Deck 19: The Goods Market

Question 1

An increase in the marginal propensity to import will cause:

A) the multiplier to increase and a given change in government spending to have a larger effect on domestic output.
B) the multiplier to increase and a given change in government spending to have a smaller effect on domestic output.
C) the multiplier to decrease and a given change in government spending to have a larger effect on domestic output.
D) the multiplier to decrease and a given change in government spending to have a smaller effect on domestic output.
E) the multiplier to decrease and a given change in government spending to have no effect on domestic output.

Answer 1

the multiplier to decrease and a given change in government spending to have a smaller effect on domestic output.

Question 2

Suppose policy makers pass a budget that results in a tax cut. This tax cut will have a greater impact on net exports when:

A) investment is unaffected by changes in income.
B) the sensitivity of investment to income is smaller.
C) the marginal propensity to import is larger.
D) the economy is closed.
E) the marginal propensity to import is smaller.

Answer 2

the marginal propensity to import is smaller.

Question 3

Assume a country is open. Given this information, which of the following must occur?

A) S + T = I + G.
B) Demand for domestic goods will be equal to the domestic demand for goods.
C) S + T = I + G + NX.
D) Demand for domestic goods will be greater than the domestic demand for goods.
E) Demand for domestic goods will be less than the domestic demand for goods.

Answer 3

S + T = I + G + NX.

Question 4

A decrease in the marginal propensity to import will cause:

A) the ZZ line to become flatter and a given change in government spending to have a larger effect on domestic output.
B) the ZZ line to become flatter and a given change in government spending to have a smaller effect on domestic output.
C) the ZZ line to become steeper and a given change in government spending to have a larger effect on domestic output.
D) the ZZ line to become steeper and a given change in government spending to have a smaller effect on domestic output.
E) the ZZ line to become steeper and a given change in government spending to have no effect on domestic output.

Question 5

Suppose policy makers want to reduce NX and keep Y constant. Which of the following policies would most likely achieve this?

A) A real exchange rate appreciation and a tax cut.
B) Encourage the country's trading partners to implement policies that will decrease foreign income.
C) A decrease in government spending.
D) A decrease in government spending and an increase in the real exchange rate.
E) A real exchange rate appreciation.

Question 6

An open economy with a low saving rate (private and public) must have:

A) a current account deficit only.
B) low investment or a current account surplus.
C) low investment only.
D) a current account surplus only.
E) low investment or a current account deficit.

Question 7

Which of the following represents the demand for domestic goods?

A) C + I + G.
B) C + I + G + X - IM/s.
C) C + I + G + X.
D) C + I + G + X + IM/s.
E) C + I + G - IM/s.

Question 8

Which of the following would cause an increase in the quantity of imports?

A) An increase in foreign output.
B) A decrease in the real exchange rate.
C) A decrease in foreign output.
D) An increase in the real exchange rate.
E) A decrease in domestic output.

Question 9

In an open economy, net exports will be equal to which of the following?

A) Z.
B) DD.
C) X - IM.
D) T - G.
E) S + T - G - I.

Question 10

Which of the following will always cause a decrease in net exports?

A) A decrease in government spending.
B) A decrease in imports.
C) A decrease in investment.
D) A decrease in the real exchange rate.
E) An increase in domestic output.

Question 11

Which of the following represents the domestic demand for goods?

A) C + I + G.
B) C + I + G + X - IM/s.
C) C + I + G - IM/s.
D) C + I + G + X.
E) C + I + G + X + IM/s.

Question 12

Which of the following is true when a country is experiencing a trade surplus?

A) Demand for domestic goods is equal to the domestic demand for goods.
B) Demand for domestic goods is greater than the domestic demand for goods.
C) Demand for domestic goods is less than the domestic demand for goods.
D) A budget deficit exists.
E) A budget surplus exists.

Question 13

Assume the domestic economy is an open economy. Which of the following will make the government spending multiplier smaller?

A) A move towards a more closed economy.
B) An increase in the marginal propensity to consume.
C) An increase in the marginal propensity to import.
D) A decrease in the marginal propensity to import.
E) A decrease in foreign output.

Question 14

We will generally observe that the more open an economy:

A) the larger the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.
B) the smaller the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.
C) the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.
D) the effect of fiscal policy on output and the trade position is ambiguous.
E) the larger the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.

Question 15

A decrease in private saving (S) can be reflected in:

A) a decrease in net exports.
B) an increase in investment.
C) a decrease in the budget surplus.
D) an increase in net exports.
E) an increase in the budget deficit.

Question 16

Which of the following conditions must be satisfied for the demand for domestic goods to be equal to the domestic demand for goods?

A) X = 0.
B) G - T = 0.
C) X = sIM.
D) S = I.
E) X = IM/s.

Question 17

Suppose policy makers want to reduce Y and keep NX constant. Which of the following policies would most likely achieve this?

A) A decrease in government spending and an increase in the real exchange rate.
B) Encourage the country's trading partners to implement policies that will decrease foreign income.
C) A real exchange rate depreciation.
D) A decrease in government spending.
E) A real exchange rate appreciation.

Question 18

Assume a country is closed. Given this information, which of the following must occur?

A) S = I.
B) Demand for domestic goods will be less than the domestic demand for goods.
C) S + T = I + G.
D) Demand for domestic goods will be greater than the domestic demand for goods.
E) A budget surplus exists.

Question 19

A change in which of the following variables will have no direct effect on the level of domestic demand?

A) Domestic income.
B) The real exchange rate.
C) Taxes.
D) The real interest rate.
E) Government spending.

Question 20

Suppose the rest of the world experiences an expansion that causes an increase in foreign income. From the domestic economy's perspective, this foreign income increase will cause which of the following as the domestic economy adjusts to the rise in foreign income?

A) An increase in net exports.
B) An increase in imports.
C) An increase in domestic income.
D) All of the above.
E) Only A and C.

Question 21

Which of the following is true when a country is experiencing a trade deficit?

A) Demand for domestic goods is equal to the domestic demand for goods.
B) Demand for domestic goods is greater than the domestic demand for goods.
C) Demand for domestic goods is less than the domestic demand for goods.
D) A budget deficit exists.
E) A budget surplus exists.

Question 22

Assume that the J- curve exists. Which of the following will occur after a real exchange rate appreciation?

A) The trade deficit will worsen immediately.
B) The real exchange rate will fall temporarily before it rises.
C) The trade deficit will improve temporarily before it worsens.
D) The real exchange rate will rise temporarily before it falls.
E) The trade deficit will worsen temporarily before it improves.

Question 23

Assume the Marshall- Lerner condition holds. Which of the following would occur as a result of a decrease in the real exchange rate?

A) An increase in domestic output.
B) A decrease in the quantity of imports.
C) An improvement of the trade balance.
D) All of the above.
E) None of the above.

Question 24

In a large country, the effect of a given change in government spending:

A) on output and the trade balance is ambiguous.
B) on output is large and the effect on the trade balance is small.
C) on output is small and the effect on the trade balance is large.
D) on output is large and the effect on the trade balance is large.
E) on output is small and the effect on the trade balance is small.

Question 25

Suppose there is a decrease in taxes. In an open economy, a tax cut will cause:

A) a decrease in exports.
B) a decrease in domestic output.
C) a decrease in net exports.
D) a decrease in imports.
E) a decrease in foreign output.

Question 26

Suppose there is an increase in foreign output. This increase in foreign output will cause which of the following in the domestic country?

A) An increase in consumption.
B) An increase in output.
C) An increase in net exports.
D) All of the above.
E) None of the above.

Question 27

An increase in which of the following variables will cause an increase in domestic demand?

A) Net exports.
B) Domestic income.
C) Foreign income.
D) The real exchange rate.
E) The nominal exchange rate.

Question 28

Which of the following is true when a country's trade position is balanced?

A) Demand for domestic goods is equal to the domestic demand for goods.
B) Demand for domestic goods is greater than the domestic demand for goods.
C) Demand for domestic goods is less than the domestic demand for goods.
D) A budget deficit exists.
E) A budget surplus exists.

Question 29

A change in which of the following variables will have no direct effect on the level of domestic demand?

A) Foreign income.
B) Government spending.
C) Domestic income.
D) Taxes.
E) The real interest rate.

Question 30

The J- curve illustrates the effects of:

A) changes in Y on NX.
B) changes in Y* on NX.
C) changes in Y on imports.
D) changes in the real exchange rate on NX.
E) changes in the real exchange rate on Y.

Question 31

A real exchange rate depreciation will initially cause a decrease in net exports when which of the following holds?

A) The Marshall- Lerner condition.
B) The J- Curve effect.
C) Net exports are initially positive.
D) Net exports are initially negative.
E) Net exports are initially zero.

Question 32

Assume that the Marshall- Lerner condition does not hold. A decrease in the real exchange rate will tend to cause which of the following to occur?

A) A decrease in NX and a decrease in Y.
B) A decrease in NX and an increase in Y.
C) An increase in NX and an increase in Y.
D) An increase in NX and a decrease in Y.
E) A decrease in NX and a decrease in Y*.

Question 33

Which of the following would cause a decrease in exports?

A) A decrease in the real exchange rate.
B) An increase in foreign output.
C) An increase in domestic output.
D) An increase in the real exchange rate.
E) A decrease in domestic output.

Question 34

Assume that the Marshall- Lerner condition does not hold. An increase in the real exchange rate will tend to cause which of the following to occur?

A) A decrease in NX and no effect on Y.
B) An increase in NX and an increase in Y.
C) A decrease in NX and an increase in Y.
D) An increase in NX and a decrease in Y.
E) A decrease in NX and a decrease in Y.

Question 35

Assume the Marshall- Lerner condition holds. Which of the following will cause an increase in net exports?

A) An increase in government spending.
B) A decrease in foreign output.
C) A real exchange rate depreciation.
D) An increase in investment.
E) A real exchange rate appreciation.

Question 36

The Marshall- Lerner condition is less likely to hold when:

A) the trade deficit is large.
B) the value effect outweighs the volume effect of a real exchange rate change.
C) the marginal propensity to consume is very large.
D) the marginal propensity to consume is very small.
E) imports and exports are very price- sensitive.

Question 37

Assume that policy makers pass a budget that calls for an increase in government spending. In an open economy, which of the following will occur as a result of this fiscal policy action?

A) Private saving increases.
B) Investment decreases.
C) The current account worsens.
D) Either A or C occurs.
E) Either A, B, or C occurs.

Question 38

We will generally observe that the less open an economy:

A) the larger the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.
B) the smaller the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position.
C) the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.
D) the effect of fiscal policy on output and the trade position is ambiguous.
E) the larger the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position.

Question 39

A decrease in the budget deficit can be reflected in:

A) a decrease in investment.
B) a decrease in saving.
C) an increase in net exports.
D) Both A and B.
E) Both A and C.

Question 40

For this question, assume that equilibrium output is determined in the ZZ- Y diagram. Further assume that policy makers' goals are: (1) to achieve balanced trade to achieve the natural level of output, say Yn. Now suppose that the initial level of equilibrium output is equal to Yn (i.e., Y = Yn) and that a trade deficit exists at this initial level of output. Which of the following policy actions would most likely enable the policy makers to achieve their two goals simultaneously?

A) A decrease in the real exchange rate.
B) A decrease in taxes and increase in the real exchange rate.
C) Convince the country's trading partners to pursue policies that will cause an increase in foreign income.
D) A decrease in government spending.
E) A decrease in government spending and the real exchange rate.

Question 41

Suppose that the rest of the world experiences a recession causing a decrease in foreign output. This decrease in foreign output will not cause which of the following to occur?

A) The domestic country's consumption to decrease.
B) The domestic country's imports to decrease.
C) The domestic country's trade balance to improve.
D) The domestic country's output to decrease.
E) The domestic country's trade balance to worsen.

Question 42

Suppose the rest of the world experiences a recession that causes a decrease in foreign income. From the domestic economy's perspective, this foreign income decrease will cause which of the following as the domestic economy adjusts to the fall in foreign income?

A) A decrease in domestic income and a decrease in imports.
B) A decrease in imports and an increase in net exports.
C) The net exports line to shift up.
D) An increase in net exports.
E) An increase in the demand for domestic goods.

Question 43

An increase in the marginal propensity to import will cause:

A) the ZZ line to become flatter and a given change in government spending to have a larger effect on domestic output.
B) the ZZ line to become flatter and a given change in government spending to have a smaller effect on domestic output.
C) the ZZ line to become steeper and a given change in government spending to have a larger effect on domestic output.
D) the ZZ line to become steeper and a given change in government spending to have a smaller effect on domestic output.
E) the ZZ line to become flatter and a given change in government spending to have no effect on domestic output.

Question 44

Policy coordination is difficult because each country:

A) prefers to be the one to increase taxes.
B) prefers that other countries increase taxes.
C) prefers that other countries increase their demand.
D) prefers to be the one to appreciate its currency.
E) prefers to be the one to increase demand.

Question 45

Which of the following would make the spending multiplier larger?

A) A real exchange rate depreciation.
B) A larger marginal propensity to import.
C) A smaller marginal propensity to save.
D) A real exchange rate appreciation.
E) A small initial trade deficit.

Question 46

Explain the difference between: (1) the demand for domestic goods; and (2) the domestic demand for goods.

Question 47

A decrease in the marginal propensity to import will cause:

A) the multiplier to increase and a given change in government spending to have a larger effect on domestic output.
B) the multiplier to increase and a given change in government spending to have a smaller effect on domestic output.
C) the multiplier to decrease and a given change in government spending to have a larger effect on domestic output.
D) the multiplier to decrease and a given change in government spending to have a smaller effect on domestic output.
E) the multiplier to increase and a given change in government spending to have no effect on domestic output.

Question 48

Using the ZZ- Y and NX graphs, illustrate graphically and explain what effect an increase in taxes will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria.

Question 49

The expression, IM, represents the value of imports in terms of:

A) foreign currency.
B) foreign goods.
C) domestic currency.
D) exports.
E) domestic goods.

Question 50

Which of the following expressions represents net exports (NX)?

A) S + T - G + I.
B) G - T + I - S.
C) S + G - T + I.
D) S + G - T - I.
E) S + T - G - I.

Question 51

Which of the following occurs when the goods market is in equilibrium?

A) Domestic output equals the domestic demand for goods.
B) Domestic output equals the demand for domestic goods.
C) Demand for domestic goods equals the domestic demand for goods.
D) Domestic output equals the domestic demand for foreign goods.
E) Net exports equals zero.

Question 52

The existence of the J- curve suggests that a real depreciation will cause:

A) an initial increase in economic activity.
B) an initial reduction in the demand for domestic goods.
C) a final increase in net exports.
D) ambiguous effects on net exports.
E) an initial increase in net exports.

Question 53

An increase in domestic demand will have which of the following effects in an open economy?

A) A smaller effect on output than in a closed economy and no effect on the trade balance.
B) A smaller effect on output than in a closed economy and a negative effect on the trade balance.
C) A smaller effect on output than in a closed economy and a positive effect on the trade balance.
D) A larger effect on output than in a closed economy and a negative effect on the trade balance.
E) A larger effect on output than in a closed economy and a positive effect on the trade balance.

Question 54

Suppose policy makers want to reduce Y and NX. Which of the following policies would most likely achieve this?

A) An increase in taxes and a decrease in the real exchange rate.
B) An increase in taxes.
C) A decrease in government spending.
D) A decrease in the real exchange rate.
E) A real exchange rate appreciation

Question 55

Suppose there is a real exchange rate appreciation. This real appreciation is more likely to cause a decrease in net exports when:

A) foreign output is relatively high.
B) imports are not at all sensitive to price changes.
C) exports and imports are relatively sensitive to price changes.
D) domestic output is relatively low.
E) the Marshall- Lerner condition does not hold.

Question 56

In a small country, the effect of a given change in government spending:

A) on output and the trade balance is ambiguous.
B) on output is large and the effect on the trade balance is large.
C) on output is small and the effect on the trade balance is large.
D) on output is small and the effect on the trade balance is small.
E) on output is large and the effect on the trade balance is small.

Question 57

For an open economy, which of the following expressions represents private saving (S)?

A) I + G - T + NX.
B) G - T - NX + I.
C) I + T - G + NX.
D) I + T - G - NX.
E) G - T + NX - I.

Question 58

Explain what the Marshall- Lerner condition represents.

Question 59

Which of the following will occur in a small country with a high marginal propensity to import?

A) Changes in government spending will cause large changes in the income balance.
B) A depreciation will cause only small changes in the trade balance.
C) Changes in government spending will cause large changes in output.
D) Changes in government spending will cause large changes in the trade balance.
E) There is no combination of policies that can eliminate the trade deficit.

Question 60

The evidence suggests that in rich countries, a real exchange rate depreciation:

A) immediately improves the trade balance.
B) has no effect on the trade balance.
C) first improves, but then worsens the trade balance.
D) eventually improves the trade balance.
E) only improves the trade balance when domestic prices rise.

Question 61

Explain the relationship between the current account balance, national saving, and investment. Use this relationship to explain the current account deficit in the U.S.

Question 62

Using the ZZ- Y and NX graphs, illustrate graphically and explain what effect an increase in foreign output will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria.

Question 63

Explain why the demand for domestic goods curve (ZZ) has a different shape than the domestic demand curve (DD).

Question 64

Suppose a country is experiencing a situation where output is above the natural level of output and a trade deficit. Further assume that the policy makers' goals are to achieve the natural level of output and balanced trade. Given this information, what type of exchange rate and/or fiscal policy can be used to achieve simultaneously these two goals? Explain.

Question 65

Explain the determinants of exports and imports.

Question 66

Explain why the multiplier in an open economy is different from the multiplier in a closed economy.

Question 67

Suppose a country's output is below the policy makers' desired level of output and is experiencing a trade surplus. Assume that the policy makers' goals are to achieve the desired level of output (i.e., the natural level of output) and balanced trade. Given this information, what type of exchange rate and/or fiscal policy can be used to achieve simultaneously these two goals? Explain.

Question 68

Explain what the J- curve is and why it occurs.

Question 69

Assuming the Marshall- Lerner condition holds and using the ZZ- Y and NX graphs, illustrate graphically and explain what effect a real exchange rate depreciation will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria.