Deck 32: International Economic Policy

Question 1

Which one of the following defines the international trade multiplier?

A) The amount that country A's income expands for each $1 increase in its exports
B) The amount by which international trade expands for each $1 expansion in exports of countryA
C) The amount that country B's imports grow for each $1 increase in country A's national income
D) A's income declines for each $1 increase in its imports
E) The amount that country B's national income rises (via an increase in exports to A) for each $1increase in country A's national income

Answer 1

The amount that country B's national income rises (via an increase in exports to A) for each $1increase in country A's national income

Question 2

Speculators would move their money into a country which had ___fiscal policy and ___ monetary policy.

A) a deflationary; a tight
B) a deflationary; a relaxed
C) an expansionary; a tight
D) an expansionary; a relaxed

Answer 2

an expansionary; a tight

Question 3

Speculators would move their money out of a country which had a current account ___and a ___
Monetary policy.

A) surplus; relaxed
B) deficit; relaxed
C) deficit; tight
D) surplus; tight

Answer 3

deficit; relaxed

Question 4

The effect of changes in imports or exports of one country on the national income of another country is called

A) the trade transmission system.
B) globalisation.
C) the international trade multiplier.
D) trade contagion.

Question 5

The most likely result of the US raising interest rates is that it would ___its trade deficit and interest rates in other countries would ___ .

A) increase; rise
B) increase; stay the same
C) decrease; rise
D) decrease; stay the same

Question 6

If the European Central Bank cuts interest rates and the Bank of England does not, it is likely that the value of the £ will ___and the UK trade deficit will ___.

A) rise; increase
B) rise; decrease
C) fall; increase
D) fall; decrease

Question 7

The term 'beggar- my- neighbour policies' is usually applied to

A) Euro- scepticism.
B) controls and restrictions on trade.
C) countries trying to solve their problems without considering the international effects.
D) the IMF imposing harsh conditions when granting loans to poor countries.

Question 8

When countries diverge, then their exchange rates tend to change. Which of the following divergences will not quickly lead to changes in exchange rates?

A) Growth rate
B) Interest rates
C) Unemployment rate
D) Inflation rate

Question 9

When countries achieve similar levels of growth, inflation and budget deficits, this is called

A) convergence.
B) international harmonisation of economic policies.
C) globalisation.
D) monetary convergence.

Question 10

Assume that the world is suffering from a recession. Which of the following policies adopted by country A would benefit other countries?

A) Giving investment grants to industry
B) Raising interest rates in an attempt to reduce inflation and make exports more competitive
C) Using protectionism to help domestic industry
D) A devaluation of the currency

Question 11

Assume that the US economy expands and that the US Federal Reserve Bank, worried by rising inflation, decides to raise interest rates. Which of the following would not occur?

A) The current account of the US's trading partners will improve.
B) Interest rates in other countries will fall.
C) The US dollar will appreciate.
D) There will be a fall in US exports.

Question 12

The G8 countries are

A) Canada, France, Germany, Italy, Japan, UK, US and Russia.
B) China, France, Germany, Italy, Japan, UK, Canada and US.
C) Canada, France, Germany, China, Australia, UK, Italy and US.
D) China, France, Germany, Japan, Russia, UK, Spain and US.

Question 13

Which was the last country to join the G8?

A) Canada
B) Russia
C) France
D) Japan

Question 14

In 1987 the G7 countries responded to pressure on the dollar caused by US budget and trade deficits by agreeing to what was known as the Louvre Accord. This did not provide for

A) convergence of interest rates.
B) the US to tackle the deficits.
C) Germany and Japan to revalue their currencies.
D) joint intervention to support the dollar.

Question 15

If countries attempt to achieve similar rates of economic growth through demand management policy, for which of the following reasons may the equilibrium rate of exchange change over the longer term?
(i) The marginal propensity to import differs from one country to another.
(ii) The relative income elasticities of demand for imports and exports differ from one country to another.
(iii) The rate of growth of productivity differs from one country to another.

A) (i) and (iii)
B) (ii) and (iii)
C) (i), (ii) and (iii)
D) (ii)
E) (i) and (ii)

Question 16

The EC arrangement which aimed to create currency stability, monetary co- operation and the convergence of economic policies, starting in 1979, was called

A) ERM.
B) ECU.
C) EMS.
D) EMU.

Question 17

The EMS was an EC arrangement which started in 1979, and aimed to create currency stability, monetary co- operation and the convergence of economic policies. It had what economists call ___ exchange rate mechanism.

A) an adjustable peg
B) a fixed
C) a floating
D) a dirty floating

Question 18

Why did the UK leave the European Exchange Rate Mechanism (ERM) in 1992?

A) There was massive speculation against the pound.
B) The ERM was changed after the Maastricht Treaty.
C) Public opinion in the UK had become much more Eurosceptic.
D) Mrs Thatcher took account of a rising tide of Euroscepticism in her party.

Question 19

The UK was a member of the European Exchange Rate Mechanism (ERM) from ___to ___ .

A) 1979; 1997
B) 1990; 1992
C) 1990; 1997
D) 1979; 1992

Question 20

Which of the following is not a reason for the vulnerability of the European Exchange Rate Mechanism (ERM) to speculation in the period from 1990 to 1993?

A) The French franc appeared to be overvalued after 1990.
B) Cuts in US interest rates were causing capital to flow to Germany.
C) The Maastricht Treaty was signed in February 1992.
D) The Germans kept their interest rates high after re- unification.

Question 21

Which of the following is not a reason for the vulnerability of the European Exchange Rate Mechanism (ERM) to speculation in the period from 1990 to 1993?

A) The proposal to set up the European System of Central Banks (ESCB) and the European Central Bank (ECB)
B) Fears that the Danish and French voters might reject the Maastricht Treaty
C) The UK entering the ERM in 1990 with an overvalued £ and a large budget deficit
D) The removal, in 1991, of restrictions on the movement of capital within the EC

Question 22

The European Exchange Rate Mechanism (ERM) survived crises in 1992 and 1993, mainly because

A) it agreed to make the bands (within which currencies could fluctuate) larger.
B) almost all of the EC countries appeared to be pursuing convergent economic policies.
C) the UK left the ERM in 1992.
D) A and B

Question 23

One lesson which could be learned from the exchange rate crises of the 1990s is that

A) globalisation has made exchange rate crises less likely.
B) controls on capital movements will not reduce speculation.
C) when central banks act together they can use their reserves to offset speculation.
D) a floating currency is the only long- term defence against speculation.

Question 24

An adjustable peg exchange rate regime is where

A) exchange rates and interest rates are fixed for a period of time but interest rates may be devalued/revalued if a deficit/surplus becomes substantial.
B) exchange rates are fixed for a period of time but may be devalued/revalued if a deficit/surplus becomes substantial.
C) interest rates are fixed for a period of time but may be devalued/revalued if a deficit/surplus becomes substantial.
D) exchange rates are fixed at a level that equates relative prices and are moved as prices change.

Question 25

The Maastricht Treaty of 1992 set out a programme for the European Monetary Union (EMU). In order to take part in the proposed single currency, countries had to fulfil five 'convergence criteria'. Which of the following was not one of the criteria?

A) Budget deficit not more than 3% of GDP
B) Unemployment not more than 2% more than the average of the three lowest countries
C) National debt not more than 60% of GDP
D) Exchange rate within the ERM bands for at least two years

Question 26

In the UK, which of the following is not a Eurosceptic argument against the UK joining the euro?

A) Makes adjustment to domestic problems more difficult
B) Makes dealing with asymmetric shocks more difficult
C) Puts too much emphasis on fiscal policy
D) Loss of national independence

Question 27

Which of the following is not usually given as a reason for having a single EC currency?

A) Increased freedom to pursue national monetary policy
B) Increased competition and efficiency
C) Elimination of the cost of currency conversion
D) Increased inward investment

Question 28

Which of the following is not usually given as a reason for having a single EC currency?

A) Lower inflation
B) Elimination of asymmetric shocks
C) Lower interest rates
D) Elimination of exchange rate uncertainty

Question 29

Which of the following is not a characteristic of an 'optimal currency area'?

A) Different countries or areas need different interest rates.
B) Labour is mobile between countries or areas.
C) Wage rates are flexible.
D) Countries or areas are similar in industrial structure.

Question 30

An optimal currency area can be defined as one which

A) minimises the degree of economic fluctuations between member countries.
B) would involve a decrease in net benefits from having a single currency if the size of the area were either to grow or to diminish.
C) maximises the amount of trade between member countries.
D) maximises the growth rates of the member countries.
E) minimises the average inflation rate between member countries.

Question 31

Asymmetric shocks in the context of a currency union are when

A) all countries have the same problems.
B) government departments have different goals.
C) shocks have different effects in different areas, countries, etc.
D) internal shocks are different from external shocks.

Question 32

Which of the following is not a Eurosceptic argument against the euro?

A) Makes dealing with asymmetric shocks more difficult
B) Makes adjustment to domestic problems more difficult
C) Leads to higher inflation
D) Loss of national independence

Question 33

Which of the following is not likely to be an advantage of the UK joining the euro?

A) Removal of exchange rate uncertainty when trading with member states
B) Increased competition leading to efficiency gains
C) Increased inward investment
D) Increased scope for using interest rates to control the economy

Question 34

Exchange controls (i.e. controls over international financial transactions) have been used successfully by

A) Taiwan in 1997.
B) Malaysia in 1998.
C) France in 1993.
D) the UK in 1992.

Question 35

In 1998 the IMF suggested that a solution to the 1997/8 Asian crises could have been exchange controls as they would have prevented

A) inward investment.
B) speculative flows.
C) massive withdrawal of funds.
D) all of the above

Question 36

Short- term movements of finance around the world can be controlled in a variety of ways. Which of the following has not been suggested as one of them?

A) Limits on the proportion of assets that can be traded in any one day/week/whenever
B) A Tobin tax of, say, 0.5% per transaction
C) Having to deposit part of a transaction in the central bank of the recipient country
D) Delays in processing transactions to make speculation more risky

Question 37

One lesson which could be learned from the exchange rate crises of the 1990s is that

A) globalisation has made exchange rate crises less likely.
B) a floating currency is the only long- term defence against speculation.
C) controls on capital movements will not reduce speculation.
D) when central banks act together they can use their reserves to offset speculation.

Question 38

If neither changes in interest rates nor central bank intervention from the reserves can halt a depreciation/appreciation of a currency that is perceived to be not at its equilibrium exchange rate, then which of the following exchange rate regimes are viable over the longer term?

A) Free floating exchange rate
B) Adjustable peg system (with just occasional adjustments)
C) Fixed with an independent monetary policy
D) Adopting the dollar or the euro or some other international currency as the domestic currency
E) A and D
F) A, B and D
G) B and C

Question 39

A Tobin tax levied on trading in financial products or on trading in foreign currencies has been suggested as a policy in the UK and Europe. Which of the following statements about the proposed tax is true?

A) A Tobin tax may increase the volume of transactions especially in derivatives, designed for purely speculative purposes, by decreasing their cost.
B) The tax will help encourage larger speculative flows of foreign currencies across borders as investors try to take further advantage of small movements in the exchange rate.
C) The tax is likely to encourage firms to invest more heavily in the UK as it will enable them to take further advantage of small movements in prices.
D) The tax will be levied at a low rate so it will have a minimal effect on trading in shares for long- term investment, but it will dampen speculative trades that take advantage of tiny potential gains from very short- term price movements.
E) The tax is unlikely to affect speculative trades that aim to gain from short- term price movements, but it will have a significantly adverse effect on long- term investment plans.

Question 40

John Williamson has proposed an exchange rate regime called Exchange Rate Target Zones. This is a form of crawling peg with broad exchange rate bands. One feature he does not suggest is

A) soft buffers where intervention is discretionary.
B) wide bands of plus or minus 10%.
C) exchange rates set at purchasing power parity levels.
D) frequent re- alignments, say each month.

Question 41

The effect of changes in imports or exports of one country on the national income of another country is called the international trade multiplier.

Question 42

When the US economy expands, assuming no change in US interest rates, this will lead to a contraction in other countries which is approximately equal to the expansion in the US.

Question 43

Exchange rates will be less variable if countries manage to converge their economies.

Question 44

If two countries have fixed their exchange rates, then they must have similar fiscal policies.

Question 45

General harmonisation of policies is possible only if there is convergence of the G8 countries, and that has not been achieved.

Question 46

A change in UK monetary policy will probably have a similar effect on other countries' national incomes to that on UK national income.

Question 47

The main reason behind the crises in the ERM in September 1992 and July/August 1993 was the lack of convergence of the economies of the ERM members.

Question 48

One of the criteria for joining the euro was that unemployment should be close to the euro- area norm.

Question 49

At the time of the launch of the euro in 1999, only Britain, Denmark and Belgium did not join.

Question 50

Asymmetric shocks are likely to be greater in a single currency area the greater is the divergence in industrial structures between different countries or regions.

Question 51

An optimal currency area is one in which the constituent parts have no need of their own exchange rates and little call for a monetary policy of their own.

Question 52

An optimal currency area is one in which the ratio of benefits to costs from having a single currency is the highest.

Question 53

The only way to stop speculation against the £ is to join the European single currency.

Question 54

If there were a 50% chance that by this time next week a currency will have depreciated by 20%, then selling the currency now will give an expected return of approximately 10% for the week.

Question 55

What were the causes of the 1997 south- east Asian crisis?

Question 56

Exchange rates move partly because economies have not converged. What are the most important differences between countries which will cause changes in the exchange rate?

Question 57

Why may it be difficult to achieve harmonisation of interest rates and inflation rates, budget deficits and economic growth, and finally inflation rates and exchange rate stability?

Question 58

What is convergence?

Question 59

What were the main features of the ERM?

Question 60

What were the five criteria for joining the euro in 1999? How many countries qualified? Who did not qualify, and why?

Question 61

What are the most often quoted advantages and disadvantages of a single EC currency?

Question 62

What is an optimal currency area? Does the EU fulfil the criteria?

Question 63

What are asymmetric shocks, and why are they important when considering monetary union?

Question 64

What are the main ways in which foreign exchange transactions could be controlled?

Question 65

Identify the problems of using controls over financial flows.

Question 66

Controls are likely to dampen speculation, not eliminate it. Why might this be viewed as a desirable outcome?

Question 67

What are the problems of the system of exchange rate target zones?