Deck 13: International linkages

Question 1

The balance of payments measures

A)the amount of foreign exchange intervention needed from the central banks
B)exports minus imports
C)the record of exchange in goods and services
D)the value of a representative basket of foreign currencies in terms of the dollar
E)none of the above

Answer 1

the amount of foreign exchange intervention needed from the central banks

Question 2

Assume the Japanese yen has appreciated relative to the U.S.dollar.Which of the following is true?

A)each dollar can now buy more yen
B)each yen can now buy more dollars
C)each dollar can now buy more Japanese goods
D)the Japanese central bank is forced to sell dollars
E)both A and C

Answer 2

each yen can now buy more dollars

Question 3

If the U.S.real exchange rate is greater than 1, we can expect that

A)goods in the U.S., on average, are more expensive than goods abroad
B)goods abroad, on average, are more expensive than goods in the U.S.
C)foreigners are less likely to buy more U.S. goods
D)the exchange rate should increase
E)domestic prices should decrease

Answer 3

goods abroad, on average, are more expensive than goods in the U.S.

Question 4

If a country has a balance-of-payments surplus, we know for sure that

A)the current account shows a surplus
B)the capital account shows a surplus
C)the sum of the current and capital accounts shows a surplus
D)net exports are positive
E)all of the above have to be true

Question 5

The increase in the real exchange rate shows

A)the increase in the ratio of domestic to foreign prices
B)the increase in foreign prices expressed in U.S. dollars relative to prices of goods produced in the U.S.
C)the decrease in foreign prices expressed in U.S. dollars relative to prices of goods produced in the U.S.
D)the decrease in competitiveness of U.S. goods
E)the decrease in the dollar price of foreign exchange

Question 6

If the price level of U.S.goods is 200, the price level of foreign goods is 125, and the dollar price of foreign currency is 1.20, what is the real exchange rate?

A)1)92
B)1)60
C)1)04
D)0)75
E)0)63

Question 7

If the real exchange rate is equal to 1,

A)currencies are at purchasing power parity
B)the relative demand for domestically produced goods will rise
C)the relative demand for domestically produced goods will fall
D)foreign investors will try to buy more domestic assets
E)net exports is equal to zero

Question 8

The reason for the slow adjustment of the real exchange rate toward purchasing power parity is that

A)there are always transportation costs involved in the movement of goods across borders
B)governments may have imposed tariffs on foreign goods
C)certain goods cannot be traded
D)people in different countries do not necessarily consume the same market basket of goods
E)all of the above

Question 9

The ease with which international investors can shift their assets around the world affects

A)real exchange rates
B)the ability of central banks to control interest rates
C)national incomes
D)the ability of central banks to conduct monetary policy
E)all of the above

Question 10

Our country's net exports will increase if

A)there is an increase in domestic income
B)there is a decrease in the real exchange rate
C)there is an increase in domestic inflation
D)many of our trade partners experience inflation
E)domestic interest rates rise due to expansionary fiscal policy

Question 11

Which of the following is the equation for the real exchange rate?

A)R = Pf/P
B)R = P/Pf
C)R = e(Pf/P)
D)R = e/(P/Pf)
E)R = e /(Pf - P)

Question 12

In 2012, imports of goods and services to the U.S.was approximately what percentage of total U.S.GDP?

A)4%
B)6%
C)12%
D)14%
E)18%

Question 13

If the real exchange rate is 1.0, the price level of U.S.goods is 120, and the dollar price of foreign exchange is 0.8, what is the price level of foreign goods?

A)75
B)80
C)100
D)120
E)150

Question 14

If a French citizen buys 100 shares of IBM stock on the New York Stock Exchange, the transaction will be recorded as

A)a surplus item in the capital account
B)a deficit item in the capital account
C)a surplus item in the current account
D)a deficit item in the current account
E)a decrease in France's GDP

Question 15

A country's balance-of-payments surplus is equal to

A)the decrease in the country's official exchange reserves
B)net capital outflow minus the current account deficit
C)the current account surplus plus private net capital inflow
D)exports minus imports
E)imports minus exports

Question 16

A country's balance of payments can be affected by changes in

A)domestic income
B)foreign income
C)the real exchange rate
D)the differential between domestic and foreign interest rates
E)all of the above

Question 17

Which of the following items are deficit items in the balance of payments for the United States?

A)a German citizen buys a U.S. Treasury bill
B)a U.S. citizen buys a vacation home in Mexico
C)a U.S. citizen makes a deposit in a Swiss bank
D)all of the above
E)only B and C

Question 18

The record of international trade in goods and services and international transfer payments is called

A)the balance of payments
B)the capital account
C)the current account
D)the foreign account
E)the exchange rate account

Question 19

If the real exchange rate is 1.80, the U.S.price level is 120, and the foreign price level is 240, what is the dollar price of foreign exchange?

A)3)6
B)2)0
C)0)9
D)0)8
E)0)5

Question 20

Which of the following is FALSE?

A)a rise in foreign income always improves a country's trade balance and leads to an increase in aggregate demand
B)a rise in domestic interest rates improves a country's trade balance since it decreases imports
C)an exchange rate depreciation improves a country's trade balance and thus increases aggregate demand
D)an increase in domestic income worsens a country's trade balance since it increases spending on imports
E)a decrease in exports leads to lower interest rates and a currency depreciation

Question 21

When financial investors use the forward exchange rate to eliminate the risk of exchange rate fluctuations, it leads to a condition that is called

A)covered interest rate parity
B)uncovered interest rate parity
C) purchasing power parity
D)managed floating
E)external balance

Question 22

If an increase in national income has a negative effect on the trade balance, we should expect that

A)domestic interest rates will rise, attracting foreign funds
B)domestic interest rates will fall, causing an outflow of funds
C)domestic assets will become more expensive
D)the central bank will expand money supply
E)the central bank will buy foreign currency thus increasing its reserves

Question 23

Under flexible exchange rates and perfect capital mobility

A)monetary policy is ineffective while fiscal policy is very effective in changing the level of output
B)monetary and fiscal policy are both very effective in changing the level of output
C)monetary policy is effective while fiscal policy is ineffective in changing the level of output
D)monetary and fiscal policy are both fairly ineffective in changing the level of output
E)monetary and fiscal policy have to be carefully coordinated if the level of output needs to be changed

Question 24

In a model with flexible exchange rates and capital mobility, expansionary fiscal policy is likely to cause

A)a currency depreciation
B)an increase in the current account surplus
C)a reduction in net exports
D)a decrease in imports
E)an outflow of funds

Question 25

As of 2013, which of the following countries had not yet adopted the euro as their currency?

A)Belgium
B)Denmark
C)Greece
D)Luxembourg
E)Spain

Question 26

Expansionary monetary policy by the U.S.Fed most likely will

A)raise U.S. GDP
B)lower the value of the U.S. dollar
C)increases the U.S. trade balance
D)lower U.S. interest rates
E)all of the above

Question 27

If exchange rates are flexible, capital is perfectly mobile, and central banks do not intervene in foreign exchange markets, then

A)balance-of-payments deficits of debtor nations will tend to worsen
B)any current account deficit must be financed by the outflow of capital
C)each nation's balance of payments will be zero
D)there is a strong link between the balance of payment and the domestic money supply
E)none of the above

Question 28

Restrictive monetary policy in the U.S.

A)raises U.S. interest rates and lowers U.S. GDP
B) increases the value of the dollar relative to other currencies
C) increases U.S. net exports
D)both A and B
E)both A and C

Question 29

If exchange rates are determined in the foreign exchange market, they are never

A)fixed
B)flexible
C)managed
D)floating
E)influenced by actions of the central bank

Question 30

Under a flexible exchange rate system, expansionary fiscal policy

A)cannot change the level of consumption
B)is very effective because crowding out cannot occur
C)has no effect on the trade balance
D)will cause a deterioration of the trade balance
E)always has to be supplemented by restrictive monetary policy

Question 31

A country following a beggar-thy-neighbor policy is

A)inducing an exchange rate depreciation to increase domestic output
B)inducing an exchange rate appreciation to create unemployment in other countries
C)imposing a tax on goods that are exported
D)imposing tariffs on imports
E)asking other nations for foreign aid

Question 32

Which of the following is TRUE in a free market economy with perfect capital mobility?

A)a nation's exchange rate will tend to equalize the cost of buying traded goods at home with the cost of buying the same goods abroad
B)a nation's exchange rate will tend to equalize the interest rate received on a government bond at home and a similar bond abroad
C)exchange rates are influenced by differentials in the inflation rates of different countries
D)exchange rates are influenced by interest rate differentials among countries and the resulting capital flow
E)all of the above

Question 33

In a model with perfect capital mobility and flexible exchange rates, an increase in government purchases will

A)increase net exports but decrease private domestic investment
B)be totally crowded by a decrease in private domestic investment of the same magnitude
C)crowd out net exports due to an exchange rate appreciation
D)increase net exports due to a depreciation of the exchange rate
E)increase consumption and net exports but decrease private domestic saving

Question 34

If the dollar price of foreign goods increases, we can expect that

A)U)S. imports and U.S. exports will both increase
B) U.S. imports will decrease and U.S. exports will increase
C) U.S. imports will increase and U.S. exports will decrease
D)U)S. imports will increase and U.S. exports will stay the same
E)U)S. net exports will decrease

Question 35

A fixed exchange rate system is in effect

A)a free market system
B)an open market system
C)a price support system
D)an international transactions system
E)an international transfer system

Question 36

Under fixed exchange rates, when a foreign central bank devalues its currency it

A)lowers the dollar price of its currency
B)raises the dollar price of its currency
C)purchases dollars in the foreign exchange market
D)sells dollars in the foreign exchange market
E)adds a variety of other foreign currencies to its reserves

Question 37

In a flexible exchange rate system with perfect capital mobility

A)expansionary monetary policy will appreciate the domestic currency
B)fiscal expansion is very effective in stimulating aggregate demand
C)fiscal expansion causes a depreciation of the domestic currency
D)the domestic interest rate can't substantially deviate from the world interest rate for very long
E)all of the above

Question 38

In which exchange rate system do central banks always stand ready to buy and sell their currency at a predetermined price?

A)a floating exchange rate system
B)a flexible exchange rate system
C)a managed exchange rate system
D)a fixed exchange rate system
E)a dirty floating exchange rate system

Question 39

An increase in government spending in Japan should

A)affect the U.S. GDP in the same way as a devaluation of the yen
B)affect the U.S. GDP in the same way as an increase in Japanese money supply
C)increase the U.S. GDP by a smaller amount than Japan's GDP
D)cause a fall in the U.S. GDP
E)not affect the U.S. GDP at all

Question 40

A real depreciation of the domestic currency will

A)improve the trade balance and increase aggregate demand
B)improve the trade balance and lower aggregate demand
C)improve the trade balance but not affect aggregate demand
D)lower the trade balance and aggregate demand
E)lower the trade balance and increase aggregate demand

Question 41

In an IS-LM model with fixed exchange rates and perfect capital mobility, a cut in government spending shifts the IS-curve to the left

A)without affecting the LM-curve
B)but then back to the right again because of the resulting increase in net exports
C)but then the central bank is forced to restrict the money supply, so the LM-curve also shifts to the left
D)but then the central bank is forced to expand money supply, so the LM-curve shifts to the right
E)but then a capital inflow from abroad results, forcing the government to reverse its policy

Question 42

In a model with perfect capital mobility and flexible exchange rates, an increase in exports

A)has no lasting effect on the equilibrium output level
B)leads to an inflow of funds from abroad
C)leads to a currency appreciation and an increase in imports
D)temporarily increases domestic interest rates
E)all of the above

Question 43

What were the side effects of the German government's fiscal expansion which was designed to help the economy of the five new states (former East Germany) after the German re-unification?

A)Germany's trade surplus increased
B)the German mark depreciated relative to the currencies of non-European trade partners
C)there was a massive inflow of foreign funds
D)other European countries were forced to raise their interest rates
E)both C and D

Question 44

A beggar-thy-neighbor policy is a policy that

A)creates domestic employment at the expense of other countries
B)uses fiscal expansion in an effort to increase net exports, output, and employment
C)is intended to appreciate a country's currency and stimulate demand for foreign goods
D)combines export subsidies with cuts in corporate income taxes
E)uses monetary restriction to raise interest rates in an effort to attract foreign capital

Question 45

In an IS-LM model with flexible exchange rates and perfect capital mobility, restrictive fiscal policy will

A)cause an appreciation of the domestic currency
B)shift first the LM-curve and then the IS-curve to the left
C)not change the overall level of output, but will change its composition
D)cause a decrease in net exports
E)lower the level of output but leave the interest rate unchanged

Question 46

In an open economy IS-LM model with flexible exchange rates and perfect capital mobility, a decrease in the income tax rate will

A)initially stimulate the economy but in the end not change the equilibrium level of output
B)increase the domestic interest rate but only temporarily
C)cause a change in the composition of output
D)cause an inflow of funds that will lead to an appreciation of the domestic currency
E)all of the above

Question 47

Which of the following targets were specified in the 1991 Maastricht Treaty to create a convergence process to a common currency for the countries of the European Community?

A)an inflation rate of no more than 1.5% above the average of the other countries
B)a budget deficit of less than 3% of GDP
C)an income-debt ratio of less than 60%
D)all of the above
E)none of the above

Question 48

In an IS-LM model with flexible exchange rates and perfect capital mobility, a restriction in money supply will

A)decrease the level of output permanently but increase the interest rate only temporarily
B) decrease both the level of output and the interest rate but only temporarily
C) temporarily decrease the level of output and temporarily increase the interest rate
D)shift the LM-curve first to the left and then back to the right as the central bank is forced to buy foreign currency reserves
E)both C and D

Question 49

If capital is perfectly mobile internationally, then

A)significant differences in interest rates across countries can persist over a long time
B)one country's interest rates can be substantially higher than the world interest rate over the long run
C)countries with interest rates much lower than in the rest of the world will experience an outflow of capital
D)an increase in U.S. interest rates will worsen the U.S. balance of payments since U.S. banks are more willing to lend internationally
E)all of the above

Question 50

In a flexible exchange rate system with perfect capital mobility, if restrictive fiscal policy is implemented, we will see

A)a shift of the IS-curve to the left followed by a depreciation of the currency and a subsequent shift of the IS-curve back to its original position
B)a shift of the IS-curve to the left followed by a depreciation of the currency and a subsequent shift of the LM-curve to the left, leaving the domestic interest rate unchanged
C)a shift of the IS-curve to the left followed by an appreciation of the currency
D)a shift of the LM-curve to the left followed by an appreciation of the currency and a subsequent shift of the LM-curve back to its original position
E)a temporary decrease in the interest rate but a long-term decrease in the level of output