Deck 13: Mechanisms of International Adjustment

Question 1

Starting from a position where the nation's money demand equals the money supply, and its balance of payments is in equilibrium, economic theory suggests that the nation's balance of payments would move into a deficit position if there occurred in the nation a:

A) Decrease in the money supply
B) Increase in the money demand
C) Decrease in the money demand
D) None of the above

Answer 1

C

Question 2

The monetary approach to balance-of-payments adjustments suggests that all payments surpluses are the result of:

A) Too high interest rates in the home country
B) Too low interest rates in the home country
C) Excess money supply over money demand in the home country
D) Excess money demand over money supply in the home country

Answer 2

D

Question 3

Exhibit 13.1
Assume the marginal propensity to consume for U.S. households equals 0.9, and the marginal propensity to import for the United States equals 0.1. Suppose there occurs an increase in investment of $10 billion at each level of income.
Refer to Exhibit 13.1. The change in the level of U.S. income resulting from the additional investment spending equals

A) $20 billion
B) $30 billion
C) $40 billion
D) $50 billion

Answer 3

D

Question 4

The monetary approach to balance-of-payments adjustments suggests that all payments deficits are the result of:

A) Too high interest rates in the home country
B) Too low interest rates in the home country
C) Excess money supply over money demand in the home country
D) Excess money demand over money supply in the home country

Question 5

Which chain of events would promote payments equilibrium for a deficit nation, according to the price-adjustment mechanism?

A) Increasing money supply--increasing domestic prices--rising imports--falling exports
B) Increasing money supply--falling domestic prices--rising imports--falling exports
C) Decreasing money supply--increasing domestic prices--falling imports--rising exports
D) Decreasing money supply--decreasing domestic prices--falling imports--rising exports

Question 6

During the gold standard era, the "rules of the game" suggested that:

A) Surplus countries should increase their money supplies
B) Deficit countries should increase their money supplies
C) Surplus and deficit countries should increase their money supplies
D) Surplus and deficit countries should decrease their money supplies

Question 7

Suppose the United States levies an interest equalization tax, which taxes Americans on dividend and interest income from foreign securities. Such a tax would be intended to:

A) Encourage financial movements from the United States to overseas
B) Discourage financial movements from the United States to overseas
C) Discourage financial movements from overseas to the United States
D) None of the above

Question 8

Suppose Japan increases its imports from Sweden, leading to a rise in Sweden's exports and income level. With a higher income level, Sweden imports more goods from Japan. Thus a change in imports in Japan results in a feedback effect on its exports. This process is best referred to as the:

A) Monetary approach to balance-of-payments adjustment
B) Discretionary income adjustment process
C) Foreign repercussion effect
D) Price-specie flow mechanism

Question 9

Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium? Variations in:

A) Domestic income
B) Foreign prices
C) Domestic prices
D) Foreign par values

Question 10

The balance-of-payments adjustment mechanism developed during the 1700s by the English economist David Hume is the:

A) Income-adjustment mechanism
B) Flexible-exchange-rate-adjustment mechanism
C) Price-adjustment mechanism
D) Rank-reserve-adjustment mechanism

Question 11

Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account. Now suppose that Canadian interest rates fall to levels below those abroad. For Canada, this tends to promote:

A) Net financial inflows
B) Net financial outflows
C) Net merchandise exports
D) Net merchandise imports

Question 12

Under the gold standard, a deficit nation facing a gold outflow and a decrease in its money supply would also experience a:

A) Rise in its interest rate and a short-term financial inflow
B) Rise in its interest rate and a short-term financial outflow
C) Fall in its interest rate and a short-term financial inflow
D) Fall in its interest rate and a short-term financial outflow

Question 13

Exhibit 13.1
Assume the marginal propensity to consume for U.S. households equals 0.9, and the marginal propensity to import for the United States equals 0.1. Suppose there occurs an increase in investment of $10 billion at each level of income.
Refer to Exhibit 13.1. The value of the multiplier for the United States equals:

A) 2
B) 3
C) 4
D) 5

Question 14

During the gold standard era, central bankers agreed to react positively to international gold flows so as to reinforce the automatic adjustment mechanism. Which of the following best represents the above statement?

A) Income-adjustment mechanism
B) Price-adjustment mechanism
C) Rules of the game
D) Discretionary fiscal policy

Question 15

Which of the following balance-of-payments adjustment mechanisms is most closely related to the quantity theory of money?

A) Income-adjustment mechanism
B) Price-adjustment mechanism
C) Interest-rate-adjustment mechanism
D) Output-adjustment mechanism

Question 16

Which chain of events would promote payments equilibrium for a surplus nation, according to the price-adjustment mechanism?

A) Increasing money supply--increasing domestic prices--rising imports--falling exports
B) Increasing money supply--falling domestic prices--rising imports--falling exports
C) Decreasing money supply--increasing domestic prices--falling imports--rising exports
D) Decreasing money supply--decreasing domestic prices--falling imports--rising exports

Question 17

Under the gold standard, a surplus nation facing a gold inflow and an increase in its money supply would also experience a:

A) Rise in its interest rate and a short-term financial inflow
B) Rise in its interest rate and a short-term financial outflow
C) Fall in its interest rate and a short-term financial inflow
D) Fall in its interest rate and a short-term financial outflow

Question 18

Assume that interest rates on comparable securities are identical in the United States and foreign countries. Now suppose that investors anticipate that in the future the U.S. dollar will appreciate against foreign currencies. Investment funds would thus be expected to:

A) Flow from the United States to foreign countries
B) Flow from foreign countries to the United States
C) Remain totally in foreign countries
D) Not be affected by the expected dollar appreciation

Question 19

Exhibit 13.1
Assume the marginal propensity to consume for U.S. households equals 0.9, and the marginal propensity to import for the United States equals 0.1. Suppose there occurs an increase in investment of $10 billion at each level of income.
Refer to Exhibit 13.1. The change in the level of U.S. imports resulting from the rise in U.S. income equals:

A) $5 billion
B) $10 billion
C) $15 billion
D) $20 billion

Question 20

Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account. Now suppose that Canadian interest rates increase to levels higher than those abroad. For Canada, this tends to promote:

A) Net financial inflows
B) Net financial outflows
C) Net merchandise exports
D) Net merchandise imports

Question 21

Table 13.1. Canada's Saving, Investment, Import, and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates
$\begin{array} { l l } \text { Eraport Function } & X = 3000 \\\text { Investuent Function } & I = 1000 \\\text { Saving Function } & S= - 1000 + 0.2 \mathrm { Y } \\\text { Import Function } & M = 500 + 0.25 \mathrm { Y }\end{array}$

-Referring to Table 13.1, if Canada's income rises by $200 billion, saving would rise by:

A) $10 billion
B) $20 billion
C) $30 billion
D) $40 billion

Question 22

Starting from a position where the nation's money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation's balance of payments would move into a surplus position if there occurred in the nation:

A) An increase in the money demand
B) A decrease in the money demand
C) An increase in the money supply
D) None of the above

Question 23

Table 13.1. Canada's Saving, Investment, Import, and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates
$\begin{array} { l l } \text { Eraport Function } & X = 3000 \\\text { Investuent Function } & I = 1000 \\\text { Saving Function } & S= - 1000 + 0.2 \mathrm { Y } \\\text { Import Function } & M = 500 + 0.25 \mathrm { Y }\end{array}$

-Referring to Table 13.1, if Canada's income rises by $200 billion, imports would rise by:

A) $50 billion
B) $75 billion
C) $100 billion
D) $125 billion

Question 24

Table 13.1. Canada's Saving, Investment, Import, and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates
$\begin{array} { l l } \text { Eraport Function } & X = 3000 \\\text { Investuent Function } & I = 1000 \\\text { Saving Function } & S= - 1000 + 0.2 \mathrm { Y } \\\text { Import Function } & M = 500 + 0.25 \mathrm { Y }\end{array}$

-Referring to Table 13.1, Canada's equilibrium level of income is:

A) $8000 billion
B) $9000 billion
C) $10,000 billion
D) $11,000 billion

Question 25

Table 13.1. Canada's Saving, Investment, Import, and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates
$\begin{array} { l l } \text { Eraport Function } & X = 3000 \\\text { Investuent Function } & I = 1000 \\\text { Saving Function } & S= - 1000 + 0.2 \mathrm { Y } \\\text { Import Function } & M = 500 + 0.25 \mathrm { Y }\end{array}$

-Referring to Table 13.1, Canada's foreign trade multiplier equals:

A) 1.75
B) 2.05
C) 2.22
D) 2.64

Question 26

Figure 13.1. U.S. Capital and Financial Account

Refer to Figure 13.1. Downward movements along U.S. capital and financial account schedule CA₀ would be caused by:

A) U.S. interest rates rising relative to foreign interest rates
B) U.S. interest rates falling relative to foreign interest rates
C) Taxes placed on income earned by U.S. residents from their foreign investments
D) Taxes placed on income earned by foreign residents from their U.S. investments

Question 27

Figure 13.1. U.S. Capital and Financial Account

Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA₀ to CA₁ if:

A) U.S. political stability improves relative to foreign political stability
B) U.S. interest rates rise relative to foreign interest rates
C) Taxes are placed on income earned by U.S. residents from foreign investments
D) Restrictions are imposed on international loans granted by foreign banks

Question 28

According to the "rules of the game" of the gold standard era, a country's central bank agreed to react to international gold flows so as to:

A) Officially devalue a currency during eras of payments surpluses
B) Officially revalue a currency during eras of payments deficits
C) Offset the automatic-adjustment mechanism (e.g., prices)
D) Reinforce the automatic-adjustment mechanism

Question 29

The formulation of the so-called income adjustment mechanism is associated with:

A) Adam Smith
B) David Ricardo
C) David Hume
D) John Maynard Keynes

Question 30

Figure 13.1. U.S. Capital and Financial Account


-Refer to Figure 13.1. U.S. capital and financial account schedule CA₀ would shift upwards, or downwards, for all of the following reasons $\underline { \text { except: } }$

A) U.S. residents being taxed on income earned from foreign investments
B) U.S. banks being restricted on loans that can be made abroad
C) U.S. political stability changing relative to foreign political stability
D) U.S. interest rates changing relative to foreign interest rates

Question 31

The value of the foreign trade multiplier equals the reciprocal of the sum of the marginal propensities to:

A) Save plus import
B) Import plus invest
C) Consume plus export
D) Save plus import

Question 32

Assume identical interest rates on comparable securities in the United States and foreign countries. Suppose investors anticipate that in the future the U.S. dollar will depreciate against foreign currencies. Investment funds would tend to:

A) Flow from the United States to foreign countries
B) Flow from foreign countries to the United States
C) Remain totally in foreign countries
D) Remain totally in the United States

Question 33

According to the quantity theory of money, a change in the domestic money supply will bring about:

A) Inverse and proportionate changes in the price level
B) Inverse and less-than-proportionate changes in the price level
C) Direct and proportionate changes in the price level
D) Direct and less-than-proportionate changes in the price level

Question 34

Figure 13.1. U.S. Capital and Financial Account

Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA₀ to CA₁ if:

A) U.S. interest rates exceeded foreign interest rates
B) Foreign interest rates exceeded U.S. interest rates
C) Taxes were placed on income earned by U.S. residents from their foreign investments
D) Taxes were placed on income earned by foreign residents from their U.S. investments

Question 35

Starting from a position where the nation's money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation's balance of payments would move into a surplus position if there occurred in the nation:

A) A decrease in the money supply
B) An increase in the money supply
C) A decrease in the money demand
D) None of the above

Question 36

Suppose that rising U.S. income leads to higher sales and profits in the United States. This would likely result in:

A) Increasing portfolio investment into the United States
B) Decreasing portfolio investment into the United States
C) Increasing direct investment into the United States
D) Decreasing direct investment into the United States

Question 37

Figure 13.1. U.S. Capital and Financial Account

Refer to Figure 13.1. Upward movements along U.S. capital and financial account schedule CA₀ would be caused by:

A) U.S. interest rates rising relative to foreign interest rates
B) U.S. interest rates falling relative to foreign interest rates
C) Taxes placed on income earned by U.S. residents from their foreign investments
D) Taxes placed on income earned by foreign residents from their U.S. investments

Question 38

Which approach to balance-of-payments adjustment suggests that balance-of-payments surpluses are the result of excess money demand in the home country?

A) Absorption approach
B) Elasticities approach
C) Monetary approach
D) Purchasing-power-parity approach

Question 39

Figure 13.1. U.S. Capital and Financial Account

Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA₀ to CA₁ if:

A) U.S. residents receive subsidies to invest in foreign nations
B) U.S. interest rates rise relative to foreign interest rates
C) Taxes are reduced on income earned by U.S. residents from their foreign investments
D) Expected profits decline on U.S. investments in foreign manufacturing

Question 40

Starting from a position where the nation's money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation's balance of payments would move into a deficit position if there occurred in the nation:

A) An increase in the money supply
B) A decrease in the money supply
C) An increase in money demand
D) None of the above

Question 41

Figure 13.2. Australian Economy Under a Fixed Exchange Rate System

Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)₀ intersects (X-M)₀, suppose that worsening profit expectations lead to an autonomous decrease in Australian investment of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

A) Rises to $60 billion, deficit of $2.5 billion
B) Rises to $60 billion, deficit of $5 billion
C) Falls to $40 billion, surplus of $2.5 billion
D) Falls to $40 billion, surplus of $5 billion

Question 42

In explaining balance-of-payments adjustments, the classical economists

A) Focused on interest rates exclusively
B) Remained aware of the role of interest rates
C) Only focused their attention on short-term interest rates
D) Paid exclusive attention to long-tem interest rates

Question 43

Under a fixed exchange rate system, adjustment mechanisms work for the automatic return to current-account balance after the initial balance has been disrupted.

Question 44

Figure 13.2. Australian Economy Under a Fixed Exchange Rate System

Refer to Figure 13.2. The slope of the (X-M) schedule and (S-I) schedule indicates that Australia's foreign trade multiplier is:

A) 0.5
B) 1.0
C) 1.5
D) 2.0

Question 45

Table 13.1. Canada's Saving, Investment, Import, and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates
$\begin{array} { l l } \text { Eraport Function } & X = 3000 \\\text { Investuent Function } & I = 1000 \\\text { Saving Function } & S= - 1000 + 0.2 \mathrm { Y } \\\text { Import Function } & M = 500 + 0.25 \mathrm { Y }\end{array}$

-Refer to Table 13.1. If weak economic conditions abroad result in Canada's exports falling from $3000 billion to $2500 billion, Canada's equilibrium income falls by approximately:

A) $888 billion
B) $990 billion
C) $1110 billion
D) $1220 billion

Question 46

Table 13.1. Canada's Saving, Investment, Import, and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates
$\begin{array} { l l } \text { Eraport Function } & X = 3000 \\\text { Investuent Function } & I = 1000 \\\text { Saving Function } & S= - 1000 + 0.2 \mathrm { Y } \\\text { Import Function } & M = 500 + 0.25 \mathrm { Y }\end{array}$

-Refer to Table 13.1. If improved business optimism leads to increases in Canada's planned investment spending from $1000 billion to $1200 billion, Canada's equilibrium income rises by approximately:

A) $444 billion
B) $555 billion
C) $666 billion
D) $777 billion

Question 47

Figure 13.2. Australian Economy Under a Fixed Exchange Rate System

Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)₀ intersects (X-M)₀, suppose that changing preferences lead to an autonomous decrease in Australian imports of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

A) Rises to $60 billion, surplus of $2.5 billion
B) Rises to $60 billion, surplus of $5 billion
C) Falls to $40 billion, deficit of $2.5 billion
D) Falls to $40 billion, deficit of $5 billion

Question 48

Figure 13.2. Australian Economy Under a Fixed Exchange Rate System

Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)₀ intersects (X-M)₀, suppose that improving profit expectations lead to an autonomous increase in Australian investment of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

A) Rises to $60 billion, deficit of $2.5 billion
B) Rises to $60 billion, deficit of $5 billion
C) Falls to $40 billion, surplus of $2.5 billion
D) Falls to $40 billion, surplus of $5 billion

Question 49

Figure 13.2. Australian Economy Under a Fixed Exchange Rate System

Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S- I)₀ intersects (X-M)₀, suppose that worsening economic conditions abroad lead to an autonomous decrease in Australian exports of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

A) Rises to $60 billion, surplus of $2.5 billion
B) Rises to $60 billion, surplus of $5 billion
C) Falls to $40 billion, deficit of $2.5 billion
D) Falls to $40 billion, deficit of $5 billion

Question 50

Figure 13.2. Australian Economy Under a Fixed Exchange Rate System

Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)₀ intersects (X-M)₀, suppose that dwindling thriftiness leads to an autonomous decrease in Australian saving to $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

A) Rises to $60 billion, deficit of $2.5 billion
B) Rises to $60 billion, deficit of $5 billion
C) Falls to $40 billion, surplus of $2.5 billion
D) Falls to $40 billion, surplus of $5 billion

Question 51

The classical gold standard

A) Existed from early 1800's to early 1900's
B) Did not allow for imports and exports of gold
C) Led to the outflow of gold from surplus nations
D) Led to the inflow of gold to deficit nations

Question 52

Prices, interest rates, and income are the automatic adjustment variables that help restore current-account equilibrium under a system of fixed exchange rates.

Question 53

David Hume's price-adjustment mechanism supported the mercantilist view that a nation could maintain a trade surplus indefinitely.

Question 54

Figure 13.2. Australian Economy Under a Fixed Exchange Rate System

Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)₀ intersects (X-M)₀, suppose that improving economic conditions abroad lead to an autonomous increase in Australian exports of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

A) Rises to $60 billion, surplus of $2.5 billion
B) Rises to $60 billion, surplus of $5 billion
C) Falls to $40 billion, deficit of $2.5 billion
D) Falls to $40 billion, deficit of $5 billion

Question 55

The classical economists assumed

A) That the volume of final output is fixed at the full-employment level in the long-run
B) The velocity of money is constant
C) The velocity of money depends on physical, structural, and institutional factors
D) All of the above

Question 56

J. M. Keynes suggested that a trade deficit nation

A) Would experience a fall in income
B) Would experience a decline in imports
C) Would require active intervention by the government
D) Both a and b

Question 57

When a country's current account moves into disequilibrium, automatic adjustments in tariffs and quotas occur which move the current account back into equilibrium.

Question 58

Figure 13.2. Australian Economy Under a Fixed Exchange Rate System

Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)₀ intersects (X-M)₀, suppose that increased thriftiness leads to an autonomous increase in Australian saving of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

A) Rises to $60 billion, deficit of $2.5 billion
B) Rises to $60 billion, deficit of $5 billion
C) Falls to $40 billion, surplus of $2.5 billion
D) Falls to $40 billion, surplus of $5 billion

Question 59

That the balance of payments could be adjusted by prices and interest rates, under a fixed exchange rate system, originated with Keynesian theory during the 1930s.

Question 60

Figure 13.2. Australian Economy Under a Fixed Exchange Rate System

Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)₀ intersects (X-M)₀, suppose that changing preferences lead to an autonomous increase in Australian imports of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

A) Rises to $60 billion, surplus of $2.5 billion
B) Rises to $60 billion, surplus of $5 billion
C) Falls to $40 billion, deficit of $2.5 billion
D) Falls to $40 billion, deficit of $5 billion

Question 61

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System

Refer to Figure 13.3. As U.S. interest rates rise relative to foreign interest rates, the U.S. slides upward along schedule CA₀, thus moving towards capital and financial account surplus.

Question 62

Regarding the equation of exchange, the classical economists assumed that final output was below its maximum level while the velocity of money was volatile.

Question 63

Under the classical gold standard, a trade surplus nation would realize gold inflows, an increase in its money supply, rising interest rates, and net investment inflows.

Question 64

According to the price-adjustment mechanism, trade deficits can occur only in the long run rather than in the short run.

Question 65

Under the price-adjustment mechanism, a government's efforts to maintain a current-account surplus is self defeating over the long run because a nation's current account automatically moves toward equilibrium.

Question 66

According to the equation of exchange, the total expenditures on final goods equals the monetary value of the final goods sold.

Question 67

The price-adjustment mechanism's relevance to the real world has been questioned on the grounds that national output is generally not at the full-employment level and that the velocity of money is not always constant.

Question 68

The gold standard's "rules of the game" required central bankers in a trade deficit nation to expand the money supply, leading to falling interest rates and net investment outflows.

Question 69

Under the classical gold standard, adjustments in domestic prices and short-term interest rates automatically promoted balance-of-payments equilibrium over the long run.

Question 70

Under the gold standard of the 1800s, exchange rates were allowed to float freely in the currency markets.

Question 71

Under the price-adjustment mechanism, a trade-surplus nation would realize gold inflows, an increase in its money supply, and a loss of international competitiveness.

Question 72

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System

Refer to Figure 13.3. Decreases in U.S. interest rates relative to foreign interest rates would shift U.S. capital and financial account schedule CA₀ downward toward CA₁, resulting in net financial outflows from the United States.

Question 73

The gold standard's "rules of the game" required central bankers in a surplus country to initiate contractionary monetary policies which lead to higher interest rates and net investment inflows.

Question 74

The essence of the classical price-adjustment mechanism is embodied in the quantity theory of money.

Question 75

The "rules of the game" served to reinforce and speed up the interest-rate-adjustment mechanism under a system of fixed exchange rates.

Question 76

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System

Refer to Figure 13.3. Falling investment profitability in the United States, relative to investment profitability abroad, would shift the U.S. capital and financial account schedule downward from CA₀ to CA₁, resulting in net financial outflows from the United States.

Question 77

Under the gold standard, each participating nation defined the mint price of gold in terms of its national currency was prepared to buy and sell gold at that price.

Question 78

According to the quantity theory of money, a change in the money supply will induce an inverse and less-than-proportionate change in the price level.

Question 79

Under the price-adjustment mechanism, trade-deficit nations realize price inflation and a loss of competitiveness while trade surplus nations realize price deflation and an improvement in competitiveness.

Question 80

Under the gold standard, a nation with a current-account surplus would realize gold outflows, a decrease in its money supply, and a fall in its domestic price level.