Deck 16: Theories of the Current Account Balance

Question 1

The ________ is a theory of the balance of trade that emphasizes how domestic spending on domestic goods changes relative to domestic output.

A)absorption approach
B)monetary approach
C)pass-through analysis
D)elasticities approach

Answer 1

A

Question 2

With fixed exchange rates,an increase in the foreign inflation rate,with constant income and domestic credit,will lead to

A)a change in the exchange rate.
B)an increase in international reserves.
C)a decrease in international reserves.
D)no change in international reserves.

Answer 2

B

Question 3

With fixed exchange rates,the adjustment to changes in international monetary conditions comes through

A)exchange rate changes.
B)exchange rate changes and international money flows.
C)international money flows.
D)None of the above.

Answer 3

C

Question 4

The shorter the "pass-through" period,the ________ the desirable BOT effects of devaluation on quantities traded will appear.

A)sooner
B)longer
C)bigger
D)smaller

Question 5

The balance of trade can only worsen if income ________ relative to absorption.

A)increases
B)decreases
C)does not change
D)None of the above

Question 6

Which of the following are theories of the BOT?

A)monetary approach
B)absorption approach
C)elasticities approach
D)Both B and C

Question 7

If U.S.export contracts are written in terms of foreign currency and import contracts are denominated in domestic currency,a devaluation of the dollar during the currency contract period

A)should increase the dollar value of exports.
B)should not have any effect on the dollar value of U.S. imports.
C)must increase the BOT.
D)All of the above

Question 8

The ________ analysis considers the ability of domestic and foreign prices to adjust to devaluation in the short run.

A)pass-through
B)absorption
C)adjustment mechanism
D)currency contract period

Question 9

With a managed float,monetary disequilibrium is eliminated through

A)international reserve flows.
B)exchange rate changes.
C)international reserve flows and exchange rate changes.
D)None of the above.

Question 10

According to the MABP,BOP disequilibria

A)must be transitory.
B)are essentially real phenomena.
C)must be permanent.
D)are not important.

Question 11

The ________ analyzes the BOP and exchange rates in terms of money supply and money demand.

A)elasticities approach
B)"pass-through of devaluation"
C)monetary approach
D)absorption approach

Question 12

Both the ________ do not put a great deal of emphasis on the capital account.

A)absorption and monetary approaches
B)monetary and elasticities approaches
C)elasticities and absorption approaches
D)None of the above

Question 13

In the case of purely flexible exchange rates,a decrease in domestic real income,with constant prices and domestic credit,will lead to

A)an increase in international reserves.
B)the depreciation of the domestic currency.
C)the appreciation of the domestic currency.
D)no change in the value of the domestic currency.

Question 14

Which of the following is not appropriate,if we live in a world of fixed exchange rates?

A)monetary approach to the exchange rate
B)elasticities approach
C)monetary approach to the BOP
D)absorption approach

Question 15

Suppose that the United Kingdom devalues the pound. If both exports and imports are written in terms of pounds,then the United Kingdom balance of trade ________ during a currency contract period.

A)improves
B)worsens
C)is unaffected
D)falls for a while before increasing

Question 16

The notion that,following a devaluation,the BOT falls for a while before increasing is called a ________ effect.

A)relative price
B)elasticity
C)J-curve
D)pass-through

Question 17

Under a managed float system,central banks can

A)allow international reserve changes.
B)let exchange rates adjust to market pressure.
C)experience reserve changes and exchange rate changes.
D)All of the above.

Question 18

Which of the following is not correct for a small open economy?

A)She cannot improve her BOT.
B)She cannot affect the international price of goods.
C)She cannot affect the foreign interest rate.
D)All of the above.

Question 19

If devaluation does not improve the BOT,but only the BOP,this implies that

A)the capital account is in deficit.
B)the current account is in surplus.
C)the improvement comes in the capital account.
D)Both B and C.

Question 20

Empirical evidence regarding the effects of devaluation on the balance of trade indicates that

A)devaluation generally improves the BOT.
B)devaluation generally hurts the BOT.
C)no strong generalizations are possible.
D)devaluation has no effect on the BOT.

Question 21

If a country's currency appreciates,then its exports will cost ________ abroad and its imports will cost ________ domestically.

A)less; less
B)less; more
C)more; less
D)more; more

Question 22

The evidence available suggests that the effects of devaluation appear to differ across countries and time so that no strong generalizations regarding the effects of devaluation on the balance of trade and/or balance of payments are possible.

Question 23

The reported reduction in the exchange-rate pass through to import prices means that U.S.inflation will be relatively insensitive to exchange rate changes.

Question 24

"Pricing-to-market" is a business practice that was common in the twentieth century,but has now all but disappeared.

Question 25

If the price of a good rises by 10% and the quantity purchased falls by 15%,then demand for the good is ________ and total spending on the good will ________.

A)elastic; increase
B)inelastic; increase
C)elastic; decrease
D)me and so inelastic; decrease

Question 26

There is evidence that the exchange-rate pass-through effect to import prices has been declining in developed economies,especially for the United States.

Question 27

With a flexible exchange rate,a nation can choose an inflation rate independent of the rest of the world.

Question 28

Suppose that the Japanese yen appreciates significantly at some point,thus making Japanese imports more expensive.Japanese exporters may lower their profit margins to reduce the effect of the yen appreciation on U.S.importers,producing a phenomenon known as

A)the J-curve.
B)the absorption effect.
C)pricing to market.
D)international reserves compliance.

Question 29

The absorption approach is a theory of the balance of payments that emphasizes how domestic spending on domestic goods changes relative to domestic output.

Question 30

The net effect of a devaluation on economic growth depends on the mix of capital and labor utilized in the nation's export industries.

Question 31

The fact that the balance of trade normally falls before increasing after a devaluation is known as

A)the J-curve.
B)the pass-through effect.
C)the balance of payments paradox.
D)the indifference reflection.

Question 32

If a country's currency depreciates,then its exports will cost ________ abroad and its imports will cost ________ domestically.

A)less; less
B)less; more
C)more; less
D)more; more

Question 33

If the price of a good rises by 10% and the quantity purchased falls by 5%,then demand for the good is ________ and total spending on the good will ________.

A)elastic; increase
B)inelastic; increase
C)elastic; decrease
D)me and so inelastic; decrease

Question 34

An increase in real income with constant prices and domestic credit leads to the same effects under both fixed and purely flexible exchange rates.

Question 35

The international adjustment mechanism for flexible exchange rates is the same as for managed float regimes.

Question 36

J-curve effects following a devaluation are simply a theoretical issue with no real world importance.

Question 37

Which of the following has been offered as a possible explanation to the evidence that the exchange-rate pass-through effect to import prices has been declining in developed economies?

A)That foreign exporters have been increasingly adopting "pricing-to-market" policies.
B)That transaction costs have decreased in recent years.
C)That global leaders have encouraged this phenomenon.
D)That the share of imports with prices more sensitive to exchange rates has been increasing.

Question 38

If devaluation improves only the BOP,rather than the BOT,this implies that the capital account must have improved following a devaluation.

Question 39

The elasticities approach and the absorption approach are theories of the balance of trade that emphasize trade in real goods and have little to say about the capital account.

Question 40

The longer the "pass-through" period following a devaluation,the faster the desirable balance of trade effects of a devaluation will appear on quantities traded.

Question 41

Explain the elasticities and absorption approaches to the BOT. What is the most notable shortcoming of these approaches?

Question 42

Recent evidence regarding the exchange-rate pass-through effect in the U.S.reflects a declining trend.How can this be explained?

Question 43

Is the "international adjustment mechanism" for fixed and flexible exchange rates the same? Discuss briefly.

Question 44

Write down a model that will allow you to analyze the BOP and exchange rate in a monetary framework. Then,discuss the consequences of an increase in the foreign inflation rate under fixed,flexible,and managed floating systems.

Question 45

What is pricing to market? Where is it most prevalent?

Question 46

What is the difference between the monetary approach to the exchange rate and monetary approach to the balance of payments? Briefly summarize the policy implications of the monetary approach.

Question 47

Discuss the short-run and long-run views of PPP. Make sure that you explain the underlying adjustment mechanism and theoretical reasoning for each view when answering the question. Which view,do you think,is more likely to represent the real world?