Question 1

Because of international time lags between ordering and the receipt of goods, a depreciation of a currency:
A) will not change import or export volumes for a time, since prices on orders already placed cannot be renegotiated.
B) will immediately change import and export volumes, because buyers and sellers always include an opt-out clause.
C) will affect import and export volumes in third countries not party to the particular transaction.
D) will never change import or export volumes.

Accepted Answer

International trade transactions often involve long time lags between the ordering of goods and their delivery. This means that even if the currency of one of the countries involved in the transaction depreciates, the prices on orders already placed cannot be renegotiated. Therefore, a depreciation of a currency will not immediately change import or export volumes, and the effects may only be felt in the long term, once new orders are placed.

Question 2

If taxes fall and foreign income falls, what will happen to output, ceteris paribus?
A) It will rise.
B) It will stay the same.
C) It will fall.
D) It is uncertain what will happen.

Accepted Answer

The effect on output is uncertain because a fall in taxes can increase domestic consumption and investment, potentially raising output, while a fall in foreign income can reduce exports, potentially lowering output. The net effect depends on the relative magnitudes of these changes.

Question 3

The trade balance component of aggregate demand is a function of all the following, EXCEPT:
A) foreign disposable income.
B) domestic disposable income.
C) the real exchange rate.
D) consumer spending.

Accepted Answer

The trade balance component of aggregate demand is affected by foreign and domestic disposable income and the real exchange rate. While consumer spending can indirectly affect the trade balance by influencing imports and exports, it is not one of the direct determinants of the trade balance component of aggregate demand.

Question 4

In the Keynesian model, when is the economy in short-run equilibrium?
A) when there is no inflation
B) when there is full employment
C) when there is a balanced federal budget
D) when total spending (demand) is equal to production (supply)

Accepted Answer

In the Keynesian model, short-run equilibrium occurs when the level of total spending (demand) in the economy is equal to the level of production (supply). This means that there is no excess demand or excess supply in the economy, and it is considered to be operating at its potential output level. Options A, B, and C are not indicative of short-run equilibrium.

Question 5

Aggregate supply is the same thing as:
A) total national spending.
B) total domestic production.
C) aggregate demand.
D) a supply shock.

Accepted Answer

Aggregate supply refers to the total amount of goods and services that all producers in the economy are willing and able to supply at a given price level. This is equivalent to total domestic production, or the total output of goods and services in the economy.

Question 6

If the interest rate rises and government spending falls, what will happen to output, ceteris paribus?
A) It will rise.
B) It will stay the same.
C) It will fall.
D) It is uncertain what will happen.

Accepted Answer

If the interest rate rises, it becomes more expensive for businesses and consumers to borrow money, which can lead to a decrease in investment and consumption spending. Additionally, if government spending falls, this will also lead to a decrease in overall spending in the economy. As a result, with a decrease in investment and consumption spending, and a decrease in government spending, output is likely to fall.

Question 7

Because a change in consumer spending is positively related to a change in income, the slope of the aggregate demand function is:
A)0.
B)1.
C)equal to the MPC.
D)equal to the marginal propensity to save.

Accepted Answer

The slope of the aggregate demand function measures the responsiveness of aggregate demand to changes in income. Since consumer spending is positively related to a change in income and the MPC measures the change in consumer spending for a given change in income, the slope of the aggregate demand function is equal to the MPC. Therefore, choice C is the correct answer.

Question 8

The total demand line will shift whenever:
A) the MPC increases.
B) output changes.
C) there is an exogenous change in one of its components (C, I, G, or X).
D) aggregate supply increases.

Accepted Answer

The total demand line will shift whenever there is an exogenous change in one of its components (C, I, G, or X), such as a change in government spending, investment, consumer behavior, or foreign demand. Changes in MPC or aggregate supply may affect the level of demand, but they do not shift the entire demand line.

Question 9

In addition to government purchases or changes in taxes, demand shocks in the economy can increase or decrease GDP, leading to a fall or rise in the trade balance. Which of the following would NOT represent a demand shock?
A) a change in household wealth leading to a rise in consumption expenditures
B) a rise in inflation
C) a change in the marginal propensity to import, causing imports to rise
D) an increase in technology, causing investment spending to rise

Accepted Answer

A rise in inflation would not represent a demand shock as it is a result of changes in the supply side of the economy, rather than changes in consumer or investor demand. Demand shocks typically involve changes in consumer spending, investment spending, or government spending.

Question 10

The goods market adjusts to an equilibrium right at the point of the Keynesian cross. Why?
A) At that point, the Keynesian theory of sticky prices is correct.
B) At only that point, total spending is equal to total production.
C) At only that point, consumers are fully satisfied and firms have maximized profits.
D) At only that point, the unemployment rate is zero and workers need not seek higher wages.

Accepted Answer

The goods market adjusts to an equilibrium right at the point of the Keynesian cross because at that point, total spending (aggregate demand) is equal to total production (aggregate supply). This means that there is neither excess demand nor excess supply in the market, which leads to stable prices and output. This is the essence of the Keynesian theory of equilibrium in the goods market, which emphasizes the importance of maintaining aggregate demand to ensure full employment of resources. The other options do not provide a satisfactory explanation for why the goods market adjusts to an equilibrium at the Keynesian cross.

Question 11

The larger the percentage of U.S. imports already priced in dollars, the less likely depreciation in the U.S. dollar will be to:
A) decrease prices of imports.
B) increase prices of imports.
C) limit trade imbalances.
D) increase trade with third-party nations.

Accepted Answer

If a large percentage of U.S. imports are already priced in dollars, a depreciation in the U.S. dollar would make those imports more expensive in terms of other currencies. Therefore, the prices of imports would increase.

Question 12

Unlike in the long-run model, in the short-run Keynesian model, we make two critical assumptions: that firms adjust production depending on _______, and that _______.
A) total demand; prices are fixed
B) resource limitations; prices are flexible
C) the market rate of interest; consumers maximize utility
D) consumer spending; there is full employment

Accepted Answer

In the short-run Keynesian model, firms adjust production depending on total demand, as they aim to meet the current level of demand from consumers. However, prices are assumed to be fixed in the short-run, as opposed to flexible in the long-run model. This means that changes in demand will impact output and employment, as opposed to prices in the short-run.

Question 13

A fall in the real exchange rate (appreciation) will decrease the trade balance in the short run and cause a(n) ________ of the total demand curve.
A) downward shift
B) increase in the slope
C) upward shift
D) decrease in the slope

Accepted Answer

The answer of A fall in the real exchange rate...

Question 14

If output falls, which of the following could be an explanation?
A) a fall in the interest rate
B) a fall in foreign income or a rise in investments
C) a decline in government spending
D) a rise in the interest rate, a fall in foreign income, or a decline in government spending

Accepted Answer

A fall in output can be caused by factors that reduce aggregate demand or aggregate supply. A rise in the interest rate can decrease investment spending, a fall in foreign income can reduce export demand, and a decline in government spending directly reduces aggregate demand. Choices A and B generally would increase output, and C is included in the broader set of conditions described in D.

Question 15

An increase in income in an open economy nation will cause a change in consumer spending on home production, and a(n): A) increase in taxes. B) decrease in savings. C) increase in foreign production. D) increase in imports if MPC_F (marginal propensity to consume foreign goods) is greater than zero.

Accepted Answer

An increase in income will lead to an increase in imports if the marginal propensity to consume foreign goods (MPC_F) is greater than zero. This is because with higher income, consumers may prefer to spend on foreign goods that are either cheaper or perceived to be of higher quality. Thus, choice D is the correct answer. Choices A, B, and C are not directly related to an increase in income in an open economy nation.

Question 16

A belief that high-tech companies would be highly profitable led to the boom in Internet companies in the 1990s, which is known as a(n):
A) investment shock.
B) investment boom.
C) technology surge.
D) technology reversal.

Accepted Answer

The answer of A belief that high-tech companies would be...

Question 17

The greater the MPC is, the ______ the slope of the demand curve.
A) greater
B) smaller
C) It depends on the trade balance.
D) The slope of the demand curve does not depend on this.

Accepted Answer

The MPC (marginal propensity to consume) measures the change in consumption for a given change in income. When the MPC is greater, it means that consumers tend to spend a larger portion of their income on goods and services, so the demand for those goods and services is higher. This results in a steeper (greater) slope of the demand curve as the quantity demanded increases at a faster rate for a given change in price.

Question 18

The Keynesian model of aggregate demand includes: I. government purchases and taxes.
II) consumer spending and investment spending.
III) exports plus imports.
A) I only
B) I and II only
C) II and III only
D) I, II, and III

Accepted Answer

The Keynesian model of aggregate demand includes all three components: government purchases and taxes (which influence government spending), consumer spending and investment spending (which are direct components of aggregate demand), and the net exports (exports minus imports), not exports plus imports as stated, but it's understood that trade impacts aggregate demand.

Question 19

The MPC shows the relationship between:
A) interest rates and investment.
B) disposable income and consumer spending.
C) saving and investing.
D) inflation and unemployment.

Accepted Answer

The MPC (Marginal Propensity to Consume) shows the relationship between disposable income and consumer spending. It is a measure of the proportion of additional income that a person or household will spend on consumption rather than save. As the level of disposable income increases, consumer spending is likely to increase as well.

Question 20

If a proportion of traded goods (such as oil) are priced in a foreign currency, the real exchange rate becomes:
A) lower.
B) higher.
C) less responsive to changes in the nominal exchange rate.
D) more responsive to changes in the nominal exchange rate.

Accepted Answer

When a proportion of traded goods, like oil, is priced in a foreign currency, the real exchange rate becomes less responsive to changes in the nominal exchange rate because the foreign currency price of these goods does not change with fluctuations in the nominal exchange rate.

Quiz 18: Balance of Payments II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run

Because of international time lags between ordering and the receipt of goods, a depreciation of a currency:

If taxes fall and foreign income falls, what will happen to output, ceteris paribus?

The trade balance component of aggregate demand is a function of all the following, EXCEPT:

In the Keynesian model, when is the economy in short-run equilibrium?

Aggregate supply is the same thing as:

If the interest rate rises and government spending falls, what will happen to output, ceteris paribus?

Because a change in consumer spending is positively related to a change in income, the slope of the aggregate demand function is:

The total demand line will shift whenever:

In addition to government purchases or changes in taxes, demand shocks in the economy can increase or decrease GDP, leading to a fall or rise in the trade balance. Which of the following would NOT represent a demand shock?

The goods market adjusts to an equilibrium right at the point of the Keynesian cross. Why?

The larger the percentage of U.S. imports already priced in dollars, the less likely depreciation in the U.S. dollar will be to:

Unlike in the long-run model, in the short-run Keynesian model, we make two critical assumptions: that firms adjust production depending on _, and that _.

A fall in the real exchange rate (appreciation) will decrease the trade balance in the short run and cause a(n) ________ of the total demand curve.

If output falls, which of the following could be an explanation?

An increase in income in an open economy nation will cause a change in consumer spending on home production, and a(n) :

A belief that high-tech companies would be highly profitable led to the boom in Internet companies in the 1990s, which is known as a(n) :

The greater the MPC is, the ______ the slope of the demand curve.

The Keynesian model of aggregate demand includes: I. government purchases and taxes. II) consumer spending and investment spending. III) exports plus imports.

The MPC shows the relationship between:

If a proportion of traded goods (such as oil) are priced in a foreign currency, the real exchange rate becomes: