Exam 16: Macroeconomic Policy in an Open Economy

The appropriate expenditure- $\underline { \text { switching } }$ policy to correct a current account surplus is:

Expenditure-switching policies include fiscal policy and monetary policy.

A nation realizes overall balance when it achieves full employment and current account equilibrium.

A nation realizes internal balance if economy achieves full employment and price stability.

At the ____, the Group-of-Five nations agreed to intervene in the currency markets to promote a depreciation in the U.S. dollar's exchange value.

Exhibit 16.1 At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information. -Refer to Exhibit 16.1. The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar's exchange value downward, it promotes an increase in the U.S.:

Given an open economy with high capital mobility, fiscal policy is strengthened under fixed exchange rates.

A nation experiences $\underline { \text { internal } }$ balance if it achieves:

Suppose the United States faces domestic inflation and a current account surplus. Should the United States $\underline { \text { revalue } }$ the dollar, one would expect the:

Assume a system of floating exchange rates. In response to relatively high interest rates abroad, suppose domestic investors place their funds in foreign capital markets. The result would be

Under a system of managed-floating exchange rates with $\underline { \text { heavy } }$ exchange rate intervention:

The goals of the Plaza Agreement of 1985 were to combat protectionism in the U.S. Congress, promote world economic expansion by stimulating demand in Germany and Japan, and to ease the burden of the U.S. debt service.

Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the

The Plaza Agreement of 1985 and Louvre Accord of 1987 are examples of:

Under a fixed exchange-rate system and high capital mobility, a contractionary fiscal policy leads to a:

Currency devaluation and revaluation are considered to be expenditure-changing policies since they alter a country's aggregate demand for goods and services.

Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the

Expenditure-switching policies include currency revaluation, currency devaluation, and direct controls such as tariffs, quotas, and subsidies.

Changes in a country's net exports, investment spending, or government spending will cause its aggregate demand curve to shift.

Was the Plaza Agreement of 1985 a success?