Question 1

Figure 13.4. Canadian Economy Under a Fixed Exchange Rate System
 
-Refer to Figure 13.4.Starting at equilibrium income $100 billion,where (S - I)? intersects (X - M)?,an autonomous decrease in Canadian exports of $10 billion leads to a $20 decrease in income and a trade deficit of $5 billion.

Accepted Answer

According to the figure, an autonomous decrease in Canadian exports would cause a leftward shift in the (X-M) curve, causing it to intersect with the (S-I) curve at a lower level of income (around $80 billion). At this lower income level, the trade deficit would indeed be $5 billion. Therefore, the statement is true.

Question 2

If the marginal propensity to save equals 0.2 and the marginal propensity to import equals 0.3,an autonomous decrease in investment spending of $1 million leads to a $2 million decrease in domestic income and a $600,000 decrease in imports.

Accepted Answer

Using the formula for the multiplier:
Multiplier = 1 / (1 - MPC)
where MPC = marginal propensity to consume = 1 - MPS (marginal propensity to save)

MPC = 1 - 0.2 = 0.8
Multiplier = 1 / (1 - 0.8) = 5

So, an autonomous decrease in investment spending of $1 million leads to a decrease in domestic income of:
$1 million x 5 = $5 million

To calculate the decrease in imports, we use the formula:
Change in imports = MPC X Change in income - (MPS + MPI) X Change in income
where MPI = marginal propensity to import

MPI = 0.3
Change in income = $5 million
MPS = 0.2

Change in imports = 0.8 x $5 million - (0.2 + 0.3) x $5 million
Change in imports = $4 million - $2.5 million
Change in imports = $1.5 million

Therefore, the decrease in imports is $1.5 million, which means the statement is true.

Question 3

An "automatic" adjustment mechanism would require a trade-surplus nation to accept price deflation and/or falling income as the cost of increasing imports.

Accepted Answer

The answer of An "automatic" adjustment mechanism would require a...

Question 4

Reliance on an automatic adjustment process tends to be unacceptable in trade-deficit nations since it requires them to accept price deflation and/or falling income as a cost of reducing imports.

Accepted Answer

An automatic adjustment process, such as a depreciation in the exchange rate or reduction in demand for imports, may lead to a decrease in prices and/or income in the trade-deficit nation. This is not an acceptable outcome for such nations, as it can have negative effects on economic growth and domestic consumption. Therefore, they may resort to other measures, such as export promotion and import substitution, to address their trade deficits.

Question 5

For an open economy subject to international trade,equilibrium income occurs where saving plus investment equals imports plus exports.

Accepted Answer

The answer of For an open economy subject to international...

Question 6

According to the monetary approach,balance-of-payments disequilibriums are the result of imbalances in a country's money supply and money demand.

Accepted Answer

According to the monetary approach to balance of payments, imbalances in a country's money supply and demand cause changes in exchange rates that in turn affect the balance of payments. An excess supply of money will result in a depreciation of the currency and a decrease in the balance of payments, while an excess demand for money will lead to an appreciation of the currency and an increase in the balance of payments.

Question 7

For the income adjustment mechanism to reverse a trade deficit,economic policymakers must be willing to permit domestic income to increase which leads to rising imports.

Accepted Answer

The answer of For the income adjustment mechanism to reverse...

Question 8

The foreign-trade multiplier equals the sum of the marginal propensity to import and the marginal propensity to save.

Accepted Answer

The foreign-trade multiplier equals the reciprocal of the marginal propensity to import minus the marginal propensity to save.

Question 9

Figure 13.4. Canadian Economy Under a Fixed Exchange Rate System
 
-Referring to Figure 13.4,Canada's marginal propensity to save equals 0.25 and marginal propensity to import equal 0.5.

Accepted Answer

The figure does not provide any information about Canada's marginal propensity to save or import.

Question 10

According to the Keynesian income-adjustment mechanism,income differentials among nations guarantee current-account equilibrium in a world of fixed exchange rates.

Accepted Answer

The Keynesian income-adjustment mechanism does not take into account exchange rates, and therefore cannot guarantee current-account equilibrium in a world of fixed exchange rates. Income differentials do not necessarily lead to equilibrium in the balance of trade.

Question 11

If the marginal propensity to save equals 0.1 and the marginal propensity to import equals 0.3,an autonomous increase in exports of $1,000 would expand domestic income by $2,500 which leads to an increase in imports of $750.

Accepted Answer

The answer of If the marginal propensity to save equals...

Question 12

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System
 
-Refer to Figure 13.3.As the U.S.government decreases taxes on income earned by U.S.residents from foreign investments,the U.S.capital and financial account schedule shifts downward from CA? to CA? and the United States realizes net financial outflows.

Accepted Answer

According to the graph, decreasing taxes on income earned by U.S. residents from foreign investments leads to a shift in the capital and financial account schedule from CA? to CA?, resulting in higher net financial outflows.

Question 13

If the marginal propensity to save equals 0.2 and the marginal propensity to import equals 0.3,the foreign-trade multiplier equal 2.0.

Accepted Answer

The answer of If the marginal propensity to save equals...

Question 14

Keynesian theory asserts that,under a system of fixed exchange rates,the influence of income changes in surplus and deficit countries will automatically promote current-account equilibrium.

Accepted Answer

The answer of Keynesian theory asserts that,under a system of...

Question 15

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System
 
-Refer to Figure 13.3.If the political and economic stability of foreign countries worsens relative to that of the United States,the U.S.capital and financial account schedule would shift downward from CA? to CA?,resulting in net financial outflows from the United States.

Accepted Answer

If the political and economic stability of foreign countries worsens relative to the United States, the U.S. capital and financial account schedule would shift upward, indicating net financial inflows into the United States as investors seek a safer environment.

Question 16

Figure 13.4. Canadian Economy Under a Fixed Exchange Rate System
 
-Referring to Figure 13.4,Canada's foreign-trade multiplier equals 2.0.

Accepted Answer

The foreign-trade multiplier in Canada under a fixed exchange rate system is shown to be 2.0 in Figure 13.4.

Question 17

Figure 13.4. Canadian Economy Under a Fixed Exchange Rate System
 
-Refer to Figure 13.4.Starting at equilibrium income $100 billion,where (S - I)? intersects (X - M)?,an autonomous decrease in saving of $10 billion leads to a $20 billion increase in income and a trade deficit of $5 billion.

Accepted Answer

According to the graph, an autonomous decrease in saving leads to an increase in income and a trade deficit. Specifically, a $10 billion decrease in saving leads to a $20 billion increase in income and a trade deficit of $5 billion. This is reflected in the intersection of the savings-investment balance (S-I) and the exports-imports balance (X-M) in the graph. Therefore, the statement is true.

Question 18

The Keynesian income-adjustment mechanism contends that a trade-surplus nation tends to realize falling income and falling imports,thus accentuating the trade surplus.

Accepted Answer

The answer of The Keynesian income-adjustment mechanism contends that a...

Question 19

Figure 13.4. Canadian Economy Under a Fixed Exchange Rate System
 
-Refer to Figure 13.4.Starting at equilibrium income $100 billion,where (S - I)? intersects (X - M)?,an autonomous decrease in Canadian imports of $10 billion leads to a $20 billion decrease in income and a trade deficit of $5 billion.

Accepted Answer

An autonomous decrease in imports would typically lead to an increase in net exports, potentially increasing income rather than decreasing it. The trade balance would improve, not result in a deficit.

Question 20

Figure 13.4. Canadian Economy Under a Fixed Exchange Rate System
 
-Refer to Figure 13.4.Starting at equilibrium income $100 billion,where (S - I)? intersects (X - M)?,an autonomous increase in Canadian investment of $10 billion leads to a $20 billion increase in income and no change in the country's trade account.

Accepted Answer

An autonomous increase in investment typically leads to a multiplied increase in income, but it can also affect the trade account by changing imports and exports, depending on the marginal propensity to import and other factors.

Quiz 13: Balance-of-payments Adjustments

Figure 13.4. Canadian Economy Under a Fixed Exchange Rate System -Refer to Figure 13.4.Starting at equilibrium income $100 billion,where (S - I)? intersects (X - M)?,an autonomous decrease in Canadian exports of $10 billion leads to a $20 decrease in income and a trade deficit of $5 billion.