Question 1

The law of one price states that if the costs of transportation are small,then the price of the same good in different countries should be roughly the same.

Accepted Answer

The law of one price states that if the costs of transportation are small, then the price of the same good in different countries should be roughly the same. This is because arbitrage will occur, whereby individuals buy the good in the cheaper country and sell it in the more expensive country, until the prices equalize. However, if transportation costs are high, this may not hold true.

Question 2

A "managed floating" system of exchange rate determination

Accepted Answer

The "managed floating" system, also known as a "dirty float," has been the primary system for determining exchange rates since 1971, following the collapse of the Bretton Woods system. This system allows currencies to float in value in the foreign exchange market but permits governments to intervene to stabilize their currency's value when necessary.

Question 3

The Bretton Woods system was the major system of exchange rate determination

Accepted Answer

The Bretton Woods system was established in 1944 and lasted until 1971. It was designed to govern international monetary relations and exchange rates between countries.

Question 4

The International Monetary Fund (IMF)was created as a part of the

Accepted Answer

The International Monetary Fund was created as a part of the Bretton Woods agreement in 1944. This agreement was signed by many countries to establish a new international monetary system after the end of World War II. The IMF was created to help promote international cooperation on monetary matters and to provide stability to exchange rates.

Question 5

Under the Bretton Woods system,currencies were fixed in terms of the U.S.dollar.

Accepted Answer

The Bretton Woods system established in 1944 fixed exchange rates for most currencies in terms of the U.S. dollar, which was in turn fixed to gold at a value of $35 per ounce.

Question 6

Monetary policy is more effective when the exchange rate is flexible and the economy is open.

Accepted Answer

When the exchange rate is flexible, it means that it can adjust to changes in monetary policy, making it a more effective tool for stimulating or slowing down the economy. Likewise, when the economy is open, a change in the interest rate or other monetary policy tools can have a greater impact on trade and capital flows, which can further affect economic activity.

Question 7

The gold standard was the major system of exchange rate determination before 1914.

Accepted Answer

The gold standard was the major system of exchange rate determination before World War I, with countries using gold as the standard of value and preserving the convertibility of their currencies into gold at a fixed price.

Question 8

Fiscal policy is more effective when the exchange rate is flexible and the economy is open.

Accepted Answer

Fiscal policy tends to be more effective in a closed economy or when the exchange rate is fixed because the impact of government spending or taxation is less likely to be diluted through changes in net exports or exchange rates. In an open economy with a flexible exchange rate, fiscal expansion can lead to currency appreciation, which can reduce net exports and offset the fiscal stimulus.

Question 9

Related to the Economics in Practice on p.705: Countries that use a common currency like the euro do not have the ability to

Accepted Answer

Countries that use a common currency like the euro cannot have their own independent monetary policy since the European Central Bank makes decisions that affect all countries in the eurozone.

Question 10

Related to the Economics in Practice on p.705: The European Central bank has experienced difficulties during the financial crisis of 2008-2009 because countries using the euro have begun to set their own euro exchange rates.

Accepted Answer

Countries using the euro cannot set their own exchange rates as exchange rate policy is determined by the European Central Bank. However, some countries within the eurozone have faced economic difficulties during the financial crisis, such as high debt levels and low economic growth.

Question 11

The gold standard was the major system of exchange rate determination

Accepted Answer

The gold standard was the major system of exchange rate determination before 1914, when most major economies were on a gold exchange standard, meaning they used gold as the sole international reserve asset. It began to decline in popularity during World War I and was officially abandoned by the United States in 1971.

Question 12

Expansionary monetary policy causes the exchange rate to depreciate.

Accepted Answer

Expansionary monetary policy involves increasing the money supply and lowering interest rates, which makes the domestic currency less attractive to foreign investors, causing a depreciation in the exchange rate.

Question 13

Under the gold standard,gold would leave the country if the country's overall balance of payments was in surplus.

Accepted Answer

Under the gold standard, gold would typically flow into a country with a balance of payments surplus, as it would be receiving more money from exports than it was spending on imports, leading to an inflow of gold to settle the difference.

Question 14

Purchasing power parity theory holds that exchange rates are set so that the price of similar goods in different countries reflects the relative interest rates in those countries.

Accepted Answer

Purchasing power parity theory holds that exchange rates are set so that the price of similar goods in different countries reflects the relative purchasing power of those currencies, not interest rates.

Question 15

The effect of a sustained increase in government spending or investment on aggregate output is larger in an open economy than in a closed economy.

Accepted Answer

In an open economy, a portion of the increased spending leaks out through imports, reducing the multiplier effect on aggregate output compared to a closed economy where all spending circulates within the economy, amplifying its impact.

Question 16

Since 1971,the world's exchange rate system can be described as a "freely floating" system.

Accepted Answer

Since 1971, the world has primarily used a managed floating exchange rate system, where currencies fluctuate in value against each other, but governments or central banks may intervene to stabilize or influence their currencies' values.

Question 17

The Bretton Woods system was the major system of exchange rate determination between World War I and World War II.

Accepted Answer

The Bretton Woods system was actually created after World War II in 1944, and lasted until 1971.

Question 18

Under the Bretton Woods system,countries experiencing large and persistent current account deficits were obliged to

Accepted Answer

Under the Bretton Woods system, if a country was experiencing a persistent current account deficit, it was required to devalue its currency. This made its exports cheaper and imports more expensive, correcting the trade imbalance.

Question 19

Under the gold standard,no gold would enter or leave the country if

Accepted Answer

Under the gold standard, the supply of money in a country was directly linked to its holdings of gold. Therefore, if the overall balance of payments remained in balance, there would be no need for gold to enter or leave the country. In case of either surplus or deficit, however, gold would be required to settle the international transactions, leading to an outflow or inflow of gold from the country respectively.

Question 20

Under the gold standard,if gold was flowing from the U.S.to Great Britain,the U.S.would experience all of the following EXCEPT

Accepted Answer

If gold was flowing from the U.S. to Great Britain, it would result in a decrease in the U.S. money supply, which would lead to higher interest rates, decreasing aggregate demand, and falling income. However, higher prices would not be a direct result of gold flowing from the U.S. to Great Britain.

Quiz 20: Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates