Deck 10: Macroeconomic Policy in Latin America

Question 1

What fiscal policy would be appropriate to prevent an economy from slipping into a recession?

A) higher taxes
B) lower government spending
C) IMF austerity program
D) lower taxes
E) less governmental social programs

Answer 1

D

Question 2

An appropriate fiscal policy means that at Y_p:

A) G < T.
B) G > T.
C) G = T.
D) X > M.
E) X < M.

Answer 2

A

Question 3

During the 1980s, fiscal deficits in Latin America averaged nearly _____ percent.

A) 1
B) 2
C) 4
D) 6
E) 8

Answer 3

C

Question 4

A fiscal deficit financed by printing money increases:

A) B.
B) M_s.
C) r.
D) a and b
E) b and c

Question 5

Which of these is the equation for the money supply?

A) B = Cp + R
B) MV = PQ
C) Y = C + G + I + (X-M)
D) Ms = Cp + D
E) none of the above

Question 6

Which of these terms is the money multiplier?

A) 1/r
B) MV
C) Ms
D) Cp
E) none of the above

Question 7

In any given economy, who is responsible for managing the money supply?

A) president
B) World Bank
C) IMF
D) central bank
E) none of the above

Question 8

During the 1980s, the average annual percentage change in the money supply was _____ percent.

A) 19.5
B) 44.3
C) 215.3
D) 168
E) 14.6

Question 9

If B changed by 50 billion pesos and r was equal to .10, then the money supply would change by _____ pesos.

A) 50 billion
B) 100 billion
C) 150 billion
D) 500 billion
E) 1 trillion

Question 10

For a typical central bank in Latin America, the most important tool of monetary policy is:

A) changing the reserve requirement.
B) changing the discount rate.
C) open market operations.
D) changing the margin requirement.
E) an election.

Question 11

The average fiscal deficit as a percentage of GDP in Latin America peaked at _____ percent in the 1980s.

A) 1
B) 2
C) 7
D) 12
E) 15

Question 12

For the 1980s, the budget deficits for Latin America ran around what percent of GDP?

A) 1%
B) 4%
C) 9%
D) 15%
E) 20%

Question 13

The sum of cash in the hands of the public and the reserves of the banking system is known as:

A) money multiplier
B) money supply
C) monetary base
D) aggregate supply
E) aggregate demand

Question 14

The sum of cash in the hands of the public and demand deposits in an economy is known as:

A) potential real GDP
B) money supply
C) monetary base
D) aggregate supply
E) money multiplier

Question 15

The amount of final goods and services an economy is producing at full employment is known as:

A) money multiplier
B) aggregate supply
C) money supply
D) monetary base
E) potential real GDP

Question 16

When the central bank makes a loan to a private sector bank, the monetary base _____. When the loan is paid off, it _______.

A) expands, expands
B) expands, contracts
C) contracts, contracts
D) contracts, expands
E) none of the above

Question 17

A rightward movement of AD would tend to:

A) increase P.
B) decrease P.
C) decrease Y.
D) increase V.
E) none of the above

Question 18

In the long run, if AD increases faster than LRAS, then:

A) P rises.
B) P falls.
C) Q falls.
D) both P and Q fall.
E) none of the above

Question 19

An exchange rate shock causes P to _____ and Y to _____.

A) increase, increase
B) decrease, stay the same
C) decrease, decrease
D) increase, stay the same
E) increase, decrease

Question 20

Which of the following is the equation of exchange?

A) B = C_p + R
B) M = B * 1/r
C) MV = PQ
D) P_x/P_m
E) none of the above

Question 21

The equation of exchange shows that changes in M can:

A) change V only.
B) change P only.
C) change either P or Q.
D) never cause inflation.
E) only cause deflation.

Question 22

Based on the equation of exchange, we can find this identity for the velocity of money:

A) V = PQ/M
B) V = M/PQ
C) V = C + G + I + (X-M)
D) V = Cp + R
E) none of the above

Question 23

In Latin America, the equation of exchange is linked to:

A) deflation.
B) inflation.
C) current account deficits.
D) intervention in the foreign exchange market.
E) commodity price volatility.

Question 24

Which of the following would shift the SRAS curve?

A) changes in the exchange rate
B) changes in the price of oil
C) changes in inflationary expectations
D) all of the above
E) none of the above

Question 25

Economic populism focuses on:

A) economic outcomes in the long run.
B) price stabilization.
C) long-run economic growth.
D) short-run economic outcomes.
E) none of the above

Question 26

Economic populism is associated with:

A) inflation.
B) low economic growth.
C) high economic growth.
D) price stability.
E) a and b

Question 27

High inflation is related to:

A) R.
B) B.
C) M.
D) all of the above
E) none of the above

Question 28

The beginning of the inflationary process in Latin America was:

A) G > T.
B) an increase in R.
C) an increase in
D) an increase in M
E) a decline in V.

Question 29

Increasing inflationary expectations can cause:

A) a shirt in AD.
B) a shift in LRAS.
C) a shift in SRAS.
D) all of the above
E) none of the above

Question 30

Which of the following created inflation in Latin America during the 1980s?

A) government budget deficits.
B) increases in the monetary base.
C) increases in the money supply.
D) all of the above
E) none of the above

Question 31

Structuralist economics emphasizes that inflation is caused by:

A) government budget deficits.
B) money supply growth.
C) aggregate supply.
D) inflationary expectations.
E) none of the above

Question 32

Describe how a fiscal deficit can end up leading to extremely high rates of inflation. Explain why central bank independence is crucial in preventing this from happening.

Question 33

Describe how a relatively small government budget deficit financed by printing money can lead to severe inflation.

Question 34

Describe how a relatively small government budget deficit could cause serious inflation.

Question 35

How is a fiscal deficit related to changes in the monetary base and the money supply? Next use this to describe inflation in Latin America in terms of the equation of exchange.

Question 36

Show how a budget deficit of 5 percent of GDP could produce a large expansion in the supply of money.

Question 37

If a government runs a budget deficit and cannot borrow, the deficit translates into an increase in the monetary base. Explain why this is true.

Question 38

What is economic populism? Explain how economic populism can have negative long-term effects on an economy.

Question 39

Explain the equation of exchange. Describe how changes in the money supply could have negative effects on the price level.

Question 40

Illustrate the inflationary process using graphs.

Question 41

Show how short-run policies that reduce unemployment can lead to inflation in the long run.

Question 42

If an unpopular military dictatorship in Latin America wanted to "buy" popularity then this could lead to G > T. How could this situation be linked to inflation?