Deck 18: Open-Economy Macroeconomics: Adjustment Policies

Question 1

The Mundell-Fleming model shows a How a nation can use fiscal and monetary policy to achieve both internal and external balance without any change in the exchange rate
B)How a nation can use fiscal policy to achieve both internal and external balance without any change in the exchange rate
C)How a nation can use monetary policy to achieve both internal and external balance with a corresponding change in the exchange rate
D)How a nation can use fiscal policy to achieve both internal and external balance with a complementary change in the exchange rate

Answer 1

A

Question 2

A nation can eliminate domestic unemployment and a balance of payments deficit while maintaining a fixed exchange rate through

A)expansionary fiscal policy and expansionary monetary policy
B)expansionary fiscal policy and contractionary monetary policy
C)contractionary fiscal policy and expansionary monetary policy
D)contractionary fiscal policy and contractionary monetary policy

Answer 2

B

Question 3

To achieve external balance and correct a recession,a nation will always have to use tight monetary policy if at the full employment level of national income the nation's BP curve is:

A)above the LM curve
B)below the LM curve
C)steeper than the LM curve
D)above the IS curve

Answer 3

A

Question 4

If the BP curve is above the point of intersection of the IS and LM curves,the nation will:

A)have a balance of payments deficit at that level of income
B)have a balance of payments surplus at that level of income
C)be in recession
D)face inflation

Question 5

The IS curve is negatively sloped because:

A)the higher is the rate of interest the smaller is the quantity of money demanded for speculative purposes
B)higher rates of interest lead to greater capital flows
C)at lower interest rates the levels of investment and national income are higher
D)at lower interest rates the level of national income is lower

Question 6

To correct a balance of payments surplus and unemployment a nation requires a:

A)devaluation and expansionary fiscal and monetary policies
B)devaluation and contractionary fiscal and monetary policies
C)devaluation or revaluation and expansionary fiscal and monetary policies
D)revaluation and either expansionary or contractionary fiscal and monetary policies

Question 7

In order to achieve internal and external balance simultaneously,a nation must usually use at least:

A)one policy
B)two policies
C)three policies
D)cannot say

Question 8

To correct a balance of payments surplus and inflation a nation requires:

A)expansionary fiscal policy and easy monetary policy
B)contractionary fiscal policy and tight monetary policy
C)contractionary fiscal policy and easy monetary policy
D)expansionary fiscal policy and tight monetary fiscal policy

Question 9

Points below internal balance line YY in the Swan diagram indicate:

A)a balance of payments deficit
B)a balance of payments surplus
C)unemployment
D)inflation

Question 10

In a world of perfectly elastic international capital flows and fixed exchange rates:

A)fiscal policy is completely ineffective
B)monetary policy is completely ineffective
C)both fiscal and monetary policies are completely ineffective
D)both fiscal and monetary policies are effective

Question 11

To correct a balance of payments surplus and inflation a nation requires a:

A)devaluation and expansionary fiscal and monetary policies
B)devaluation and contractionary fiscal and monetary policies
C)devaluation and either expansionary or contractionary fiscal and monetary policies
D)revaluation and either expansionary or contractionary fiscal and monetary policies

Question 12

To correct a balance of payments deficit and inflation a nation requires:

A)contractionary fiscal policy and easy monetary policy
B)contractionary fiscal policy and tight monetary policy
C)expansionary fiscal policy and tight monetary policy
D)any of the above depending on the level of inflation and the size of the initial deficit

Question 13

To correct unemployment and a balance of payments deficits with flexible exchange rates and imperfect capital mobility:

A)both fiscal and monetary policies are required
B)fiscal policy is required
C)monetary policy is required
D)either monetary or fiscal policy is required

Question 14

The most important economic objective of industrial nations is:

A)external balance
B)internal balance
C)a reasonable rate of growth
D)an equitable distribution of income

Question 15

Restrictions on capital exports is an example of a(n)

A)exchange control
B)trade control
C)quota
D)none of the above

Question 16

To correct a balance of payments deficit and unemployment a nation requires a:

A)devaluation and expansionary fiscal and monetary policies
B)devaluation and contractionary fiscal and monetary policies
C)devaluation and either expansionary or contractionary fiscal and monetary policies
D)revaluation and either expansionary or contractionary fiscal and monetary policies

Question 17

To correct a balance of payments deficit and inflation a nation requires a:

A)devaluation and expansionary fiscal and monetary policies
B)devaluation and contractionary fiscal and monetary policies
C)devaluation or revaluation and contractionary fiscal and monetary policies
D)revaluation and either expansionary or contractionary fiscal and monetary policies

Question 18

Direct controls refer to:

A)tariffs,quotas,and other quantitative restrictions on the flow of international trade
B)restrictions on international capital flows
C)multiple exchange rates
D)all of the above

Question 19

Over the last decade the U.S.budget deficit and the U.S.balance of payments deficit have moved

A)in the same direction
B)in opposite directions
C)in the same direction some years and the opposite direction other years
D)none of the above

Question 20

To correct unemployment from a condition of external balance,a nation will usually have to use:

A)expansionary fiscal policy only
B)easy monetary policy only
C)expansionary fiscal policy and easy monetary policy
D)expansionary fiscal policy and tight monetary policy

Question 21

Can a nation reach both internal and external balance under fixed exchange rates using only monetary policy?
Explain.

Question 22

What is meant by a three market balance equilibrium?

Question 23

Explain why according to monetarists
(a)nations retain control over their money supply under a flexible exchange rate system but not under a fixed exchange rate system.
(b)nations could not sterilize continuous money outflows or inflows under a fixed exchange rate system in order to retain control over their money supply.

Question 24

A nation can eliminate domestic overemployment and a balance of payments surplus while maintaining a fixed exchange rate through

A)expansionary fiscal policy and expansionary monetary policy
B)expansionary fiscal policy and contractionary monetary policy
C)contractionary fiscal policy and expansionary monetary policy
D)contractionary fiscal policy and contractionary monetary policy

Question 25

Use a Swan diagram to identify a point at which a nation has domestic unemployment and a trade surplus.What combination of policies should be used to restore balance?

Question 26

It is preferable to use monetary and fiscal policies rather than direct controls to correct external balance problems because direct controls

A)are ineffective.
B)are not legal under WTO rules.
C)interfere with the market mechanism.
D)cannot be used with other economic policies.

Question 27

Use graph to illustrate the effect of perfect capital mobility under fixed and flexible exchange rate regimes.

Question 28

Suppose a nation faces domestic unemployment and a surplus in its balance of payments.(a)Explain in detail the expenditure-changing policies required to cure the unemployment.(b)What would happen to the nation's external balance?
Why?

Question 29

What are direct controls?

Question 30

The LM curve is positively sloped because:

A)at higher levels of income,the transactions demand for money is higher.
B)higher rates of interest lead to lower capital flows
C)at lower interest rates the levels of investment and national income are higher
D)at lower interest rates the level of national income is higher