Deck 23: International adjustment and interdependence

Question 1

A country's trade imbalance can improve if there is a

A)change in domestic money supply and therefore prices
B)change in employment, wages, and therefore competitiveness
C)change in fiscal policy
D)change in the exchange rate
E)all of the above

Answer 1

all of the above

Question 2

The real exchange rate is defined as

A)the nominal exchange rate divided by the domestic price level
B)the nominal exchange rate divided by the foreign price level
C)the nominal exchange rate divided by the ratio of the foreign price level to the domestic price level
D)the nominal exchange rate multiplied by the ratio of the foreign price level to the domestic price level
E)the nominal exchange rate multiplied by the domestic price level

Answer 2

the nominal exchange rate multiplied by the ratio of the foreign price level to the domestic price level

Question 3

Under a system of flexible exchange rates, the long-run outcome of expansionary monetary policy will be

A)a depreciation of the domestic currency
B)an appreciation of the domestic currency
C)a lower level of frictional unemployment
D)lower real interest rates
E)a higher level of real output

Answer 3

a depreciation of the domestic currency

Question 4

A country often delays devaluating its currency since

A)it will reduce domestic living standards
B)it will increase the level of inflation
C)it is considered politically unpopular
D)all of the above
E)none of the above

Question 5

Under a system of fixed exchange rates, the process of correcting current account deficits by price and money supply adjustments is called

A)the Keynesian adjustment process
B)the Bretton Woods adjustment process
C)the classical adjustment process
D)the J-curve effect
E)the hysteresis effect

Question 6

Under flexible exchange rates, if the domestic currency depreciates, net exports will most likely

A)increase in both the short run and the long run
B)decrease in both the short run and the long run
C)increase in the short run but decrease in the long run
D)decrease in the short run but increase in the long run
E)increase in the short run, but remain unchanged in the long run

Question 7

The monetary approach to balance of payments problems, often used by the IMF, relies on

A)restricting monetary policy
B)imposing domestic credit controls
C)creating a recession
D)letting interest rates increase
E)all of the above

Question 8

Under a fixed exchange rate system, the central bank of a country that experiences a temporary current account deficit will most likely

A)devalue the currency
B)permit depreciation of the currency
C)sell foreign currency to keep the exchange rate from depreciating
D)buy foreign currency to influence exchange rates
E)conduct open market purchases

Question 9

If real wages are sticky and export demand permanently declines, then

A)import prices will fall
B)the domestic currency will appreciate
C)a recession will result, but it will be short-lived since nominal wages will adjust immediately
D)a prolonged period of unemployment will result
E)the current account will show a surplus

Question 10

Under a system of flexible exchange rates, monetary expansion is entirely neutral in the long run.In other words, the long-run effect of monetary expansion is that

A)nominal money supply, prices, and the nominal exchange rate all increase proportionally
B)real money balances are not affected
C)relative prices, including the real exchange rate, are not affected
D)real output and the level of unemployment are not affected
E)all of the above

Question 11

Which of the following policy measures CANNOT be used to reduce a current account deficit?

A)a tariff on imported goods
B)a devaluation of the currency
C)restrictive monetary policy
D)expansionary fiscal policy
E)a combination of A)and C)

Question 12

Which of the following is NOT a method of eliminating a current account deficit?

A)levying tariffs
B)implementing expenditure-switching policies
C)implementing expenditure-reducing policies
D)subsidizing imports
E)reducing government spending

Question 13

In a freely floating exchange rate system, exchange rates tend to overshoot after a monetary contraction, since

A)interest rates adjust immediately but exchange rates and prices adjust only gradually
B)prices and interest rates adjust immediately but exchange rates adjust only gradually
C)exchange rates adjust immediately but prices adjust only gradually
D)the gain in competitiveness causes a temporary increase in output
E)none of the above

Question 14

Which of the following is NOT a combination of an expenditure-switching and an expenditure-reducing policy?

A)an increase in tariffs combined with restrictive monetary policy
B)an increase in tariffs combined with restrictive fiscal policy
C)restrictive monetary policy combined with expansionary fiscal policy
D)open market sales combined with a devaluation in the currency
E)an income tax increase combined with a devaluation of the currency

Question 15

A country that is unable to service its foreign debt may be forced to

A)depreciate its currency
B)tighten fiscal policy
C)reduce government regulations and privatize state-owned firms
D)undergo a major recession before the economy can improve
E)all of the above

Question 16

When a country runs a balance of payments deficit under a system of fixed exchange rates, which of the following is NOT part of the automatic adjustment process?

A)a decrease in money supply leads to a lower level of spending
B)a decrease in aggregate demand lowers domestic prices
C)a decrease in domestic prices relative to foreign prices reduces the level of imports
D)an increase in tariffs reduces the level of imports
E)an increase in unemployment leads to lower wages

Question 17

Assume a country lacks technical innovation in its domestic industries and, as a result, experiences a severe decline in exports.What kind of policy should this country employ to get back to a situation of internal and external balance?

A)an increase in government spending
B)an increase in tariffs on import goods
C)restrictive monetary policy in combination with expansionary fiscal policy
D)expansionary monetary policy in combination with restrictive fiscal policy
E)expansionary fiscal policy in combination with the levying of tariffs on imports

Question 18

Under a system of fixed exchange rates, a country experiencing unemployment and a balance of payments surplus should employ

A)expansionary monetary policy
B)expansionary fiscal policy
C)an income tax cut combined with a devaluation of the currency
D)open market sales combined with a devaluation of the currency
E)a combination of restrictive fiscal and expansionary monetary policy

Question 19

Under a system of flexible exchange rates and perfect capital mobility, restrictive monetary policy will in the long run

A)lower inflation and the nominal exchange rate, while leaving real output, relative prices, and the real exchange rate the same
B)increase the real interest rate
C)lower inflation, the exchange rate, and the real interest rate
D)leave output the same, while lowering the real interest rate and the real exchange rate
E)reduce real money balances, domestic prices, and the real exchange rate

Question 20

Under a system of flexible exchange rates, an increase in the domestic price level will reduce the amount of domestic goods demanded since

A)lower real money balances will increase interest rates and reduce domestic spending
B)domestic goods will become less competitive with foreign goods and net exports will decrease
C)higher domestic prices will reduce disposable income and therefore consumption
D)both A) and B)
E)both B) and C)

Question 21

If the central bank employs restrictive monetary policy, which of the following will be the most likely sequence of events?

A)higher real domestic interest rates, inflow of funds, appreciation of the domestic currency
B)lower real domestic interest rates, outflow of funds, appreciation of the domestic currency
C)lower real domestic interest rates, outflow of funds, depreciation of the domestic currency
D)lower inflation, lower nominal domestic interest rates, outflow of funds, depreciation of the domestic currency
E)lower inflation, lower nominal domestic interest rates, inflow of funds, depreciation of the domestic currency

Question 22

A country has an internal and external balance when

A)it has a trade surplus and a budget surplus
B)the trade balance is zero and the government budget is balanced
C)net exports and the inflation rate are both zero
D)the trade balance and the unemployment rate are both zero
E)the trade balance is zero and output is at the full-employment level

Question 23

If exchange rates are flexible and capital is perfectly mobile, money expansion will lead to

A)an immediate adjustment in the exchange rate, but a gradual adjustment in prices
B)an immediate change in competitiveness
C)a decrease in interest rates and a capital outflow in the short run
D)a proportionate increase in money, prices, and the exchange rate in the long run, leaving output and real money balances unchanged
E)all of the above

Question 24

Calls for protectionism are most likely to occur under

A)a fixed exchange rate system
B)a flexible exchange rate system
C)a pegged exchange rate system
D)the IMF approach to balance of payments problems
E)a system of target zones

Question 25

In a system of freely floating exchange rates and perfect capital mobility, an increase in tariffs on foreign goods will result in

A)an increase in domestic interest rates in the short run
B)an increase in the value of the domestic currency in the short run
C)an increase in the value of the domestic currency in the long run
D)no change in domestic interest rates or income in the long run
E)all of the above

Question 26

If there is perfect capital mobility, domestic interest rates can never diverge significantly from world interest rates unless

A)expectations about exchange rates among countries suddenly change
B)there are substantial tax differences among countries
C)countries interfere with the free flow of capital
D)all of the above
E)none of the above

Question 27

The J-curve effect states that

A)appreciation of a currency always worsens the trade balance unless it is accompanied by an expenditure-reducing policy
B)depreciation of a currency immediately improves the trade balance
C)depreciation of a currency may initially worsen the trade balance but will ultimately improve it
D)in the short run the physical volume of trade is affected by a currency depreciation, but in the long run the change in trade is offset by the change in relative prices
E)large exchange rate changes may lead to changes in trade patterns that persist even after exchange rates return to their initial level

Question 28

Substantial intervention in foreign exchange markets by a central bank in an attempt to maintain an exchange rate is called

A)sterilization
B)synchronization
C)dirty floating
D)managed neutralization
E)open market operations

Question 29

Which of the following is NOT a good reason for a central bank to intervene in foreign exchange markets?

A)lowering of domestic inflation by currency appreciation
B)prevention of domestic currency depreciation
C)offsetting a temporary change in trade patterns
D)achieving an internal balance
E)smoothing unstable exchange rate expectations

Question 30

If the yield on a Japanese government security is 6%, the yield on a U.S.government security of the same maturity is 4%, and the exchange rate of the dollar to the Japanese yen is expected to depreciate by 3%, then

A)Americans are likely to buy Japanese government securities
B)Japanese people are likely to buy American government securities
C)the Fed is likely to intervene in the foreign exchange market by buying Japanese yen
D)the Japanese central bank is likely to intervene in the foreign exchange market by selling U.S. dollars
E)both C)and D)

Question 31

Suppose the domestic interest rate is 10%, the foreign interest rate is 12%, and the domestic currency is expected to appreciate by 4%. We should expect to see

A) a capital inflow and a reduction in the foreign interest rate
B) a capital inflow and a reduction in the domestic interest rate
C) a capital outflow and a reduction in the foreign interest rate
D) a capital outflow and an increase in the domestic interest rate
E) a capital outflow and an increase in the foreign interest rate

Question 32

If we have perfect capital mobility and financial markets expect the domestic currency to appreciate in value, then

A)there will be an outflow of capital to countries abroad
B) we can expect a decrease in domestic unemployment
C)we can expect a loss in competitiveness
D)people are only willing to hold domestic assets at an interest rate that is higher than the world interest rate
E)all of the above

Question 33

Suppose the domestic interest rate is 15%, the foreign interest rate is 11%, and the domestic currency is expected to depreciate by 3%.What is the adjusted interest rate differential?

A)1% in favor of the home country
B)1% in favor of the foreign country
C)4% in favor of the home country
D)4% in favor of the foreign country
E)7% in favor of the home country

Question 34

Assume that domestic nominal interest rates decrease while domestic real interest rates increase.We can

A)expect an outflow of capital to countries abroad
B)expect a loss in competitiveness
C)assume that the domestic inflation rate has probably increased
D)expect a depreciation of the domestic currency
E)all of the above

Question 35

Under a crawling peg exchange rate policy, the exchange rate is

A)depreciated at a rate roughly equal to the inflation differential between a country and its trading partners
B)depreciated at the same rate as the domestic rate of inflation
C)appreciated at the same rate as the domestic rate of inflation
D)changed slowly at the same rate as the increase in the trade deficit (surplus)
E)depreciated slowly so that the real exchange rate will change gradually to improve the country's competitiveness

Question 36

The hysteresis effect suggests that after a long and persistent overvaluation of the U.S.dollar

A)foreign central banks are likely to intervene in the foreign exchange market in an effort to depreciate the dollar again
B)there will be a change in trade patterns that will last even after the value of the dollar has come down
C)foreign firms will initially gain market shares from U.S. firms but will lose them as soon as the dollar starts to depreciate again
D)a depreciation of the dollar will initially lower net exports but the trend will soon reverse and the trade balance will ultimately improve
E)none of the above

Question 37

The J-curve effect explains that after a currency depreciates in value

A)price effects are stronger in the short run; volume effects are stronger in the long run
B)price effects are outweighed by volume effects in both the short and long runs
C)volume effects are outweighed by price effects in the long run but not in the short run
D)net exports do not suffer as the price and volume effects offset each other in the long run
E)net exports suffer in the long run as the price effects become zero

Question 38

"If the inflation rate differs between two countries, the exchange rate will change in such a way as to maintain constant terms of trade." This statement describes

A)synchronization
B)sterilization
C)purchasing power parity
D)comparative advantage
E)exchange rate overshooting

Question 39

A currency depreciation usually leads to a short-term worsening of the trade balance followed by a trade balance improvement.This phenomenon is referred to as the

A)hysteresis effect
B)J-curve effect
C)purchasing power parity effect
D)exchange rate overshooting effect
E)sterilization effect

Question 40

Many economists believe that a major shortcoming of a system of flexible exchange rates is

A)the inability of central banks to conduct independent monetary policy
B) real exchange rate variability caused by relatively sticky wages and prices
C) real exchange rate variability caused by supply shocks, fiscal shocks, and changes in trade flows
D)the fact that domestic interest rates can never deviate from interest rates in other countries
E)both B)and C)are often cited, but by different groups of economists

Question 41

If a central bank conducts open market purchases in the domestic market at the same time as it intervenes in the foreign exchange market by selling foreign currency, it is

A)working at cross purposes
B)sterilizing the foreign exchange intervention
C)implementing an expenditure reducing policy
D)depreciating its currency while increasing domestic money supply
E)appreciating its currency while decreasing domestic money supply

Question 42

The short-run effects of lower U.S.income taxes may include

A)an appreciation of the Japanese yen versus the U.S. dollar
B)a decrease in the trade imbalance with Japan
C)a decrease of imports into the U.S.
D)a decrease in U.S. net exports
E)all of the above

Question 43

The central bank of a country with a balance of payments deficit may intervene in foreign exchange markets by selling some of its foreign currency holdings.If it wants to sterilize the intervention the central bank must also

A)purchase government bonds from domestic banks
B)sell government bonds to domestic banks
C)impose ceilings on domestic credit
D)restrict money supply
E)none of the above

Question 44

Which of the following arrangements allows for the least amount of discretionary policy?

A)a currency board
B)a target zone
C)ad hoc intervention
D)a dirty floating exchange rate system
E)a freely floating exchange rate system

Question 45

A currency board

A)regulates how much a central bank can intervene in foreign exchange rate markets
B)controls how much money the central bank can print to finance large budget deficits
C)provides 100% backing for the domestic currency in foreign reserves or gold
D)allows for more discretionary monetary policy than target zones
E)has to be established when the domestic currency is replaced with a stable, generally accepted currency such as the U.S. dollar or the Euro

Question 46

A country can export inflation when it

A)imposes tariffs on imported goods
B)engages in expansionary fiscal policies that lead to a currency appreciation
C)engages in expansionary monetary policies that lead to a currency appreciation
D)provides export subsidies to domestic industries
E)imposes tariffs and employs expansionary monetary policies

Question 47

In a model with flexible exchange rates and capital mobility, monetary contraction in the U.S.is likely to cause

A)an appreciation of the U.S. dollar
B)an increase in the GDP of other countries
C)a decrease in the U.S. inflation rate
D)all of the above
E)none of the above

Question 48

Which of the following countries experienced the steepest decline in real GDP in 2009?

A)Germany
B)Japan
C)Mexico
D)Russia
E)the United States

Question 49

The equation NX = S + (TA - G - TR) - I implies that

A)there is always a close correlation between the government budget deficit and the trade deficit
B)if national saving increases relative to domestic investment, the trade deficit will decrease
C)a reduction in the government budget deficit is likely to raise the level of saving and/or worsen the trade deficit
D)an increase in government spending will stimulate exports
E)a tax decrease can help to create a trade surplus

Question 50

Which of the following countries had the highest growth rate of real GDP in 2011?

A)Canada
B)China
C)Germany
D)Japan
E)the United States