Question 1

Suppose Brazil faces domestic recession and a current account surplus.Should Brazil revalue its currency,one would expect the:

Accepted Answer

If Brazil revalues its currency, it will become more expensive for foreign countries to purchase Brazilian goods and services, and this will lead to a decrease in exports. This will lead to a decrease in the current account surplus. However, since the country is already facing a domestic recession, a revaluation of the currency will make imports cheaper, leading to an increase in imports. As a result, the recession will become more severe. Therefore, the correct answer is C.

Question 2

A nation experiences external balance if it achieves:

Accepted Answer

External balance refers to equilibrium in the balance of payments, which includes the current account (trade in goods and services) and the capital account (financial flows). A nation achieves external balance when its total exports equal its total imports, and there are no significant imbalances in financial flows. This means that the nation is not accumulating debt or running surpluses for extended periods, which can cause instability and vulnerability.

Question 3

A nation experiences overall balance if it achieves:

Accepted Answer

A nation's overall balance would be achieved when it has balance-of-payments equilibrium which means it is able to manage its imports and exports in a way that it does not have to borrow heavily from other countries. Full employment ensures that people are able to earn and contribute to the economy, which in turn boosts its growth. Price stability ensures that inflation is under control and people can afford to purchase goods without worrying about exorbitant costs. Therefore, option A is the best choice.

Question 4

A nation experiences internal balance if it achieves:

Accepted Answer

Internal balance is achieved when there is both full employment and price stability in an economy. Full employment ensures that everyone who wants a job can get one, while price stability ensures that the general level of prices remains stable and inflation is low. Together, these two conditions create a well-functioning and healthy economy. Option A and D are incorrect because full employment and price instability or unemployment and price instability do not create internal balance. Option B is incorrect as price stability alone is not enough to achieve internal balance.

Question 5

Suppose that Brazil faces domestic inflation and a current account deficit.Should Brazil devalue its currency,one would expect the:

Accepted Answer

The answer of Suppose that Brazil faces domestic inflation and...

Question 6

Given fixed exchange rates,assume Mexico initiates contractionary monetary and fiscal policies to combat inflation.These policies will also:

Accepted Answer

The answer of Given fixed exchange rates,assume Mexico initiates contractionary...

Question 7

Most industrial countries generally considered ____ as the most important economic goal.

Accepted Answer

Internal balance refers to the goal of achieving full employment and price stability within a country's economy. This is typically considered the most important economic goal for industrial countries as it ensures the stability and well-being of their domestic economies. A) External balance refers to achieving a balance in trade and financial flows between countries, which is important but not necessarily the most important goal. C) and D) Maximum efficiency for business and labor are important objectives, but they are not typically considered the primary economic goal for industrial countries.

Question 8

An expenditure-increasing policy would consist of an increase in:

Accepted Answer

An expenditure-increasing policy would aim to increase the aggregate demand in the economy. One way to achieve this is by increasing the money supply, which would increase the amount of money circulating in the economy and thus consumption and investment spending. Import tariffs and quotas would decrease imports but would not necessarily increase overall spending, and governmental taxes would decrease disposable income and thus spending.

Question 9

Which policies are expenditure-changing policies?

Accepted Answer

Monetary and fiscal policies are expenditure-changing policies as they affect the level of spending in an economy. Monetary policy is a policy implemented by a central bank to control the supply of money in the economy through interest rates and open market operations. Fiscal policy involves changes in government spending and taxation levels to influence the level of aggregate demand in an economy. Currency devaluation and revaluation, import quotas and tariffs, and wage and price controls are not expenditure-changing policies as they do not directly affect the level of spending in an economy.

Question 10

Given fixed exchange rates,assume Mexico initiates expansionary monetary and fiscal policies to combat recession.These policies will also:

Accepted Answer

The answer of Given fixed exchange rates,assume Mexico initiates expansionary...

Question 11

Suppose the United States faces domestic recession and a current account deficit.Should the United States devalue the dollar,one would expect the:

Accepted Answer

The answer of Suppose the United States faces domestic recession...

Question 12

Given an open economy with high capital mobility and floating exchange rates,suppose an expansionary monetary policy is implemented to combat recession.The initial and secondary effects of the policy

Accepted Answer

The answer of Given an open economy with high capital...

Question 13

The appropriate expenditure-switching policy to correct a current account deficit is:

Accepted Answer

Currency devaluation can make exports cheaper and imports more expensive, which can boost a country's exports and lower imports. This can help correct a current account deficit by encouraging domestic consumers to purchase locally produced goods, and by boosting the competitiveness of domestic producers in foreign markets.

Question 14

In a closed economy,which of the following will cause the economy's aggregate demand curve to shift to the right?

Accepted Answer

Decreases in income taxes for households will increase their disposable income and therefore increase their consumption spending. This will cause the aggregate demand curve to shift to the right. A decrease in wages and salaries paid to employees and a decrease in the productivity of labor would cause a decrease in consumption and investment spending, shifting the aggregate demand curve to the left. An increase in the prices of oil and natural gas would increase production costs for firms, causing a decrease in investment and consumption spending and shifting the aggregate demand curve to the left.

Question 15

An expenditure-reducing policy would consist of a decrease in:

Accepted Answer

An expenditure-reducing policy aims to decrease government expenditures in order to reduce overall spending in the economy. Decreasing the par value of a currency (A) may stimulate exports, but it would not necessarily reduce overall spending. Lowering import duties (C) may stimulate spending, as consumers would have increased access to cheaper imported goods. Reducing business or household taxes (D) may stimulate investment and consumption, again leading to higher spending levels.

Question 16

Given an open economy with high capital mobility and floating exchange rates,suppose an expansionary fiscal policy is implemented to combat recession.The initial and secondary effects of the policy

Accepted Answer

An expansionary fiscal policy leads to an increase in government spending, causing an initial increase in aggregate demand. However, high capital mobility leads to an increase in demand for domestic currency, causing an appreciation of the exchange rate. This, in turn, leads to a decrease in net exports, causing a decrease in aggregate demand. Therefore, the initial and secondary effects of the policy have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real output.

Question 17

A problem that economic policy makers confront when attempting to promote both internal and external balance for the nation is that monetary or fiscal policies aimed at the domestic sector also have impacts on:

Accepted Answer

Monetary or fiscal policies aimed at the domestic sector have an impact on both trade flows and capital flows. For example, expansionary monetary policy such as lowering interest rates may lead to capital outflows as investors seek higher returns in other countries. This can also lead to a currency depreciation, which can improve export competitiveness but lead to higher import prices and eventually inflation. On the other hand, contractionary fiscal policy such as reducing government spending can lead to a reduction in aggregate demand and imports, but it may also dampen investment and economic growth, leading to lower capital inflows. Thus, promoting internal and external balance requires a careful balancing act between different policy objectives that may have trade-offs and unintended consequences.

Question 18

Suppose the United States faces domestic inflation and a current account surplus.Should the United States revalue the dollar,one would expect the:

Accepted Answer

Revaluing the dollar would make US goods more expensive for foreign buyers, potentially reducing the current account surplus. Additionally, a stronger dollar could help to control inflation by making imports cheaper, thereby increasing competition and reducing prices. Therefore, one would expect the inflation to become less severe and the surplus to become less severe.

Question 19

The appropriate expenditure-switching policy to correct a current account surplus is:

Accepted Answer

The answer of The appropriate expenditure-switching policy to correct a...

Question 20

Which policy is an expenditure-switching policy?

Accepted Answer

Decreasing import tariffs is an expenditure-switching policy because it makes imports more expensive relative to domestically produced goods, encouraging consumers to buy locally produced products and therefore switching their expenditures from foreign to domestic products, thereby boosting domestic production, employment, and output.

Quiz 16: Macroeconomic Policy in an Open Economy