Question 1

The capital account summarizes the flow of money into and out of domestic and foreign assets.

Accepted Answer

The capital account records the flow of money related to investments and real estate between a country and its foreign counterparts.

Question 2

The International Monetary Fund:

Accepted Answer

The International Monetary Fund (IMF) was founded as part of the Bretton Woods agreements in 1944, along with the International Bank for Reconstruction and Development (IBRD), which later became the World Bank. The United Nations was not established until the following year, in 1945, and the League of Nations had dissolved in 1946.

Question 3

When a country uses a flexible (or floating)exchange rate and transactions increase the supply of its currency,the country's:

Accepted Answer

With a flexible (or floating) exchange rate, the value of a currency is determined by the supply and demand in the foreign exchange market. When transactions increase the supply of a currency, the demand for that currency decreases, causing the value of the currency to depreciate. As the currency depreciates, the country's products become cheaper to others, which can stimulate exports and help to reduce a trade deficit.

Question 4

The gold account is a component of the balance of payments account.

Accepted Answer

The answer of The gold account is a component of...

Question 5

The World Bank:

Accepted Answer

The World Bank is primarily focused on lending money to countries for economic development projects. They provide financial assistance to support sustainable economic growth and poverty reduction in developing countries.

Question 6

If the United States increases the interest rate in order to attract foreign currency to support the value of the dollar,then the United States is operating to maintain a _____ exchange rate.

Accepted Answer

Increasing interest rates to attract foreign currency and support the value of the dollar indicates an intention to maintain a fixed exchange rate, where the value of the currency is pegged to another currency or a basket of currencies.

Question 7

When a country uses a flexible (or floating)exchange rate,_____ will cause its currency to depreciate in the foreign exchange market.

Accepted Answer

All of the answers are correct because in a flexible exchange rate system, the currency value is determined by market forces of supply and demand. An increase in interest rates abroad would decrease demand for the country's currency, causing it to depreciate. A decrease in domestic interest rates would also decrease demand for the currency, leading to depreciation. A decrease in foreign income would lower demand for the country's exports, leading to a decrease in demand for their currency and depreciation.

Question 8

Exports of goods and services are included in the capital account.

Accepted Answer

Exports of goods and services are included in the current account of the balance of payments, not the capital account. The capital account records capital transfers and acquisitions or disposals of non-produced, non-financial assets.

Question 9

Under a flexible exchange system,an expansionary monetary policy would:

Accepted Answer

An expansionary monetary policy involves lowering interest rates and increasing money supply, which will lead to a decrease in the value of the currency due to increased supply and lowered demand from foreign investors. The decreased value of the currency will make exports cheaper and imports more expensive, which will help boost economic growth in the short term.

Question 10

The Bretton Woods agreement:

Accepted Answer

The Bretton Woods agreement established a fixed exchange rate system, but it was maintained by purchases and sales of currency, not gold. The agreement also established the International Monetary Fund (IMF) and the World Bank, so choice B is incorrect. The agreement did not encourage countries to devalue their currencies, so choice D is also incorrect.

Question 11

Under a fixed exchange rate system and a neutral monetary policy,an expansionary fiscal policy will be reinforced by an open economy because of the resultant capital _____ U.S.capital markets,which _____ interest rates.

Accepted Answer

An expansionary fiscal policy typically leads to higher interest rates, attracting foreign capital. This inflow of capital to the U.S. capital markets reduces interest rates less than they would increase without such inflows, hence reinforcing the fiscal expansion.

Question 12

Robert Mundell predicted:

Accepted Answer

Robert Mundell predicted both the breakdown of the Bretton Woods fixed exchange rate system and the adoption of a single currency by a group of countries. He is known as the "father of the euro" for his advocacy of a single currency for the European Union.

Question 13

Under a fixed exchange rate system,a neutral fiscal policy,and perfect capital mobility,a contractionary monetary policy is ineffective because the:

Accepted Answer

Under a fixed exchange rate system, the exchange rate is fixed, so an increase in interest rates will attract foreign capital flows. A contractionary monetary policy increases interest rates, attracting foreign capital flows and increasing the US money supply. Therefore, an effective contractionary monetary policy is not possible.

Question 14

Which action is an effect of a contractionary policy under a fixed exchange rate system?

Accepted Answer

The answer of Which action is an effect of a...

Question 15

Under flexible exchange rates,an open economy _____ monetary policy and _____ fiscal policy.

Accepted Answer

Under flexible exchange rates, changes in the money supply affect exchange rates, and changes in government spending and taxes affect interest rates. Therefore, monetary policy and fiscal policy reinforce each other.

Question 16

The capital account includes payments for imports and exports of goods and services,incomes flowing into and out of the country,and net transfers of money.

Accepted Answer

The capital account mainly records transactions involving the purchase and sale of foreign assets and liabilities, such as real estate or stocks and bonds, rather than trade in goods and services or income flows, which are recorded in the current account.

Question 17

Robert Mundell discussed the problems of moving from a _____ to a _____.

Accepted Answer

Robert Mundell is known for his contributions to the theory of optimum currency areas and his work on international monetary systems. He received the Nobel Prize in Economics in 1999. Mundell discussed the problems of moving from a fixed exchange rate system to a flexible exchange rate system, as he believed that fixed exchange rate systems can be beneficial for smaller economies that rely heavily on trade, while flexible exchange rates are better suited for larger economies with diverse trade partners. Moving from a fixed to a flexible exchange rate system can lead to uncertainty and volatility in exchange rates, and can create challenges for businesses that rely on stable exchange rates for planning and investment purposes.

Question 18

Today,the United States' exchange rate system is:

Accepted Answer

The United States currently has a flexible exchange rate system, where the value of the currency is determined by supply and demand in the foreign exchange market, rather than being fixed to a specific rate or commodity such as gold.

Question 19

Robert Mundell is best known for:

Accepted Answer

Robert Mundell is best known for his contributions to the field of international economics. He is considered the father of the theory of optimum currency areas and received the Nobel Prize in Economics in 1999 for his work in this area.

Question 20

The effects of expansionary fiscal and monetary policies differ under a flexible exchange rate system because they have different effects on:

Accepted Answer

Expansionary fiscal policy (increasing government spending or decreasing taxes) and expansionary monetary policy (increasing the money supply) both aim to increase aggregate demand but have different effects on interest rates. Expansionary fiscal policy tends to increase interest rates by increasing demand for loanable funds, while expansionary monetary policy tends to decrease interest rates by increasing the supply of money.

Quiz 16: Open Economy Macroeconomic