Deck 23: Price Adjustments and Balance-Of-Payments Disequilibrium

Question 1

In the "gold standard" framework of the period 1880-1914, suppose that the par value exchange rate is $2.00/£1. If the market exchange rate rises to $2.12/£1 because of a rise in U.S. demand for British goods, and if it costs $0.05 to ship gold between the two countries, there would be __________. Then, if the "rules of the game" were being followed, the money supply in the United States would __________ after this movement of gold.

A) an inflow of gold to the U.S. Treasury from the Bank of England; decrease
B) an inflow of gold to the U.S. Treasury from the Bank of England; increase
C) an outflow of gold from the U.S. Treasury to the Bank of England; decrease
D) an outflow of gold from the U.S. Treasury to the Bank of England; increase

Answer 1

C

Question 2

If, under the gold standard, the par value of the Swiss franc in terms of the dollar is
$0)80, and if it costs $0.01 to move one franc's worth of gold between the countries, then
The "gold export point" from the United States is at __________, and the "gold import
Point" into the United States is at __________.

A) $0.80 = 1 Swiss franc; $0.80 = 1 Swiss franc
B) $0.79 = 1 Swiss franc; $0.81 = 1 Swiss franc
C) $0.81 = 1 Swiss franc; $0.79 = 1 Swiss franc
D) $0.82 = 1 Swiss franc; $0.78 = 1 Swiss franc

Answer 2

B

Question 3

Is the Marshall-Lerner condition of any relevance for the successful operation of the gold standard adjustment mechanism? Explain.

Answer 3

not answered

Question 4

Given the following table showing various $/£ exchange rates and the respective
Quantities of pounds demanded by U.S. buyers:
$\begin{array} { c c } \$ / £ & \text { pounds demanded } \\\hline \$ 2.50 / £ 1 & £ 1,000 \\\$ 2.00 / £ 1 & £ 1,500 \\\$ 1.50 / £ 1 & £ 1,800\end{array}$
The demand for pounds between $2.00/£1 and $1.50/£1 is

A) elastic.
B) unit-elastic.
C) inelastic.
D) elastic, unit-elastic, or inelastic - cannot be determined without more information.

Question 5

Under either a gold standard or a pegged-rate system, what changes in the money supply are necessary in order for effective adjustment to take place? Why are these changes necessary?

Question 6

In which of the following cases can we conclude, without any further information, that a depreciation of a country's currency will worsen the country's trade balance (or current account balance).

A) demand curve for exports is horizontal; supply curve of imports is horizontal
B) demand curve for exports is vertical; demand curve for imports is vertical
C) demand curve for exports is horizontal; demand curve for imports is horizontal
D) supply curve of exports is horizontal; supply curve of imports is horizontal

Question 7

Using the information in the table in Question #10 above, the arc elasticity of demand for
Pounds between the $2.50/£1 exchange rate and the $2.00/£1 exchange rate is (ignoring
The negative sign) __________.

A) 0.56
B) 1.33
C) 1.80
D) 2.50

Question 8

If depreciation of a home currency occurs, foreign exporters to the home country could offset some of the impact of the depreciation by __________ the price/cost ratio on goods sent to the home country; such a change in the price/cost ratio would mean that there was
__________ "pass-through" of the exchange rate change to foreign export prices.

A) decreasing; complete
B) decreasing; less-than-complete
C) increasing; complete
D) increasing; less-than-complete

Question 9

If, in a demand curve/supply curve graph with the quantity of U.S. imports plotted on the horizontal axis and the price of U.S. imports in dollars plotted on the vertical axis, suppose that, from an initial equilibrium position, there is now a depreciation of the U.S. dollar relative to other currencies. (Assume that the supply curve is horizontal.) Other things equal, this depreciation of the dollar would cause the __________.

A) demand curve to shift to the left (or vertically downward)
B) demand curve to shift to the right (or vertically upward)
C) supply curve to shift vertically downward
D) supply curve to shift vertically upward

Question 10

The simple Marshall-Lerner condition would suggest that one of the following cases would produce a worsening of the trade balance if the country's currency depreciated. Which one? (The negative sign on elasticities is being ignored; also, assume that trade is initially balanced.)

A) elasticity of demand for exports = 0.8; elasticity of demand for imports = 0.5
B) elasticity of demand for exports = 0.4; elasticity of demand for imports = 0.6
C) demand curve for exports is vertical; demand curve for imports is horizontal
D) elasticity of demand for exports = 0.8; elasticity of demand for imports = 0.1

Question 11

Suppose that there is an increase in the supply of foreign exchange due to an inflow of foreign investment in a flexible-rate system. Explain how this would affect the balance on current account, being careful to explain any assumptions about the foreign exchange market that are critical to your discussion.

Question 12

"The J curve occurs because of differences of short-run elasticities from long-run elasticities." Explain the reasoning behind this statement.

Question 13

Assume a two-country world containing country A (whose currency is the dollar) and country B (whose currency is the peso). In this context, and using relevant graphs, explain how a depreciation of the dollar against the peso (for example, a 10% depreciation) conceptually affects the quantity of A's exports to B and the quantity of A's imports from B. (You can use either dollars or pesos on the vertical axes of your graphs. Also, assume that "pass-through" is complete.) Then carefully explain why economists say that such a depreciation could actually worsen the trade balance (or current account balance) of country A and indicate the Marshall-Lerner condition. Finally, define the "J curve" and give a very brief explanation of why it has the shape that it does.

Question 14

Briefly compare and contrast the price adjustment mechanism under fixed exchange rates to that under flexible exchange rates. Why is a price adjustment necessary under a fixed-rate system?

Question 15

If a home country depreciates or devalues its currency by 10 percent, and if there is
"complete pass-through" as well as horizontal supply curves of exports and imports, then
The price of the country's exports in terms of foreign currency will __________ and the
Price of the country's imports in terms of home currency will __________.

A) not change; rise by 10 percent
B) not change; not change
C) fall by 10 percent; rise by 10 percent
D) fall by 10 percent; not change

Question 16

If, in a demand curve/supply curve graph with the quantity of U.S. exports plotted on the horizontal axis and the price of U.S. exports in dollars plotted on the vertical axis, suppose that, from an initial equilibrium position, there is now a depreciation of the U.S. dollar relative to other currencies. (Assume that the supply curve is horizontal.) Other things equal, this depreciation of the dollar would cause the __________.

A) demand curve to shift to the left (or vertically downward)
B) demand curve to shift to the right (or vertically upward)
C) supply curve to shift vertically downward
D) supply curve to shift vertically upward

Question 17

The shape of the curve that shows the effect of currency depreciation upon a country's current account balance over time, with the curve itself being known as the __________, reflects the fact that short-run demand elasticities are sufficiently __________ than long-
Run elasticities to generate this particular shape. (Ignore the negative sign on the
Elasticities.)

A) J curve; lower
B) J curve; higher
C) supply curve of foreign exchange; lower
D) supply curve of foreign exchange; higher

Question 18

When considering the change in price of a country's imports when foreign currencies depreciate by 10 percent relative to the home country, the "elasticity of exchange rate pass-through" would be equal to

A) 1.0 if there were no "pass-through."
B) 1.0 if there were complete "pass-through."
C) zero if there were complete "pass-through."
D) 10 percent if there were complete "pass-through."

Question 19

Suppose that a 5% depreciation of the U.S. dollar raises the dollar price of a U.S. import
Good by 5%. This situation would be characterized as a situation of __________ "pass-
Through" (or "exchange-rate pass-through"), and U.S. consumers of the imported good
Would spend a larger dollar amount on the imported good than they did before the
Depreciation of the dollar if their demand for the good is __________.

A) complete; inelastic
B) complete; elastic
C) incomplete or partial; inelastic
D) incomplete or partial; elastic

Question 20

If country A depreciates its currency against country B's currency, then, other things
Equal,

A) there should be "expenditure switching" towards A's goods by residents of both countries.
B) there should be "expenditure switching" towards A's goods only by A's residents.
C) there should be "expenditure switching" towards B's goods by residents of both countries.
D) B's goods become cheaper to country A's residents.

Question 21

Which one of the following situations would represent a "small-country" case in the analysis of the elasticities approach to devaluation?

A) demand for exports curve has normal downward slope, supply curve of imports is
Horizontal
B) supply curve of imports has normal upward slope, demand curve for exports is
Horizontal
C) supply curve of imports is horizontal, demand curve for exports is vertical
D) demand curve for exports is horizontal, supply curve of imports is horizontal

Question 22

Which one of the following was NOT supposed to occur in the "gold standard"
International monetary system?

A) Countries were to specify their currency values in terms of gold.
B) Countries were to prevent gold movements from influencing their money
Supplies.
C) Free movement of gold was to occur among countries.
D) Countries were to have wage and price flexibility.

Question 23

Other things equal, which of the following occurs if a country A appreciates its
Currency relative to country B's currency?

A) A's export goods become cheaper to B's citizens.
B) A's export goods become more expensive to A's citizens.
C) B's export goods become cheaper to A's citizens.
D) B's export goods become cheaper to B's citizens.

Question 24

Which of the following occurs if a country A depreciates its currency relative to country B's currency?

A) A's export goods become cheaper to A's residents.
B) A's export goods become cheaper to B's residents.
C) B's export goods become cheaper to A's residents.
D) B's export goods become more expensive to B's residents.