Deck 11: An Introduction to Open Economy Macroeconomics

Question 1

Taxes,savings,and imports tend to magnify the effect of any spending change in the economy; that is,if investment spending initially increases,then spending will grow even more as taxes,savings,and imports increase,so the economic growth will accelerate.

Answer 1

False

Question 2

Suppose the Asian financial crisis decreased U.S.exports.In the aggregate demand/aggregate supply model,this would be represented as

A)a shift to the right of aggregate supply, which would result in more production for the U.S. economy.
B)a shift to the left of aggregate supply, which would result in less production for the U.S. economy.
C)a shift to the right of aggregate demand, leading to more spending and production in the U.S. economy.
D)a shift to the left of aggregate demand, leading to less spending and production in the U.S. economy.

Answer 2

D

Question 3

If consumption spending increases because people feel more confident about the future,

A)aggregate demand will shift to the left.
B)aggregate demand will shift to the right.
C)aggregate supply will shift to the left.
D)aggregate supply will shift to the right.

Answer 3

B

Question 4

For any given increase in spending that is not directly caused by an increase in income,the impact on equilibrium GDP is greater than the initial spending increase.

Question 5

What typically happens to imports as income and spending rise?

Question 6

Economic growth would be illustrated by

A)a rightward shift of aggregate demand.
B)a leftward shift of aggregate demand.
C)a rightward shift of aggregate supply.
D)a leftward shift of aggregate supply.

Question 7

Intermediate inputs are

A)goods used for household consumption only.
B)goods used for government consumption only.
C)goods purchased by one business from another to use in production.
D)raw materials used in the production process.

Question 8

When spending and incomes in an economy increase,

A)imports are likely to increase.
B)imports are likely to be unchanged.
C)imports are likely to decrease.
D)exports are likely to decrease.

Question 9

When aggregate demand meets aggregate supply in the vertical portion of the aggregate supply curve,

A)an increase in demand will cause prices to rise but no change in output.
B)an increase in demand will cause output to rise but no change in prices.
C)an increase in demand will cause prices to fall but no change in output.
D)an increase in demand will cause output to fall but no change in prices.

Question 10

Which of the following is true?

A)Points along the aggregate supply curve show the equilibrium levels of output and prices that are consistent on the demand side of the economy.
B)Points along the aggregate demand curve show the equilibrium levels of output and prices that are consistent on the supply side of the economy.
C)Aggregate demand shows the levels of GDP and prices where expenditure decisions and production decisions match.
D)Aggregate supply shows the levels of GDP and prices where expenditure decisions and production decisions match.

Question 11

When aggregate demand increases,

A)the price level is likely to rise as GDP rises.
B)the price level is likely to fall as GDP rises.
C)aggregate supply will shift to the right.
D)aggregate supply will shift to the left.

Question 12

Assume that aggregate supply meets aggregate demand in the upward sloping portion of the AS curve.For each of the following,graph the change in aggregate supply and/or aggregate demand,and state the effect on prices and output.
1. The demand for U.S.exports increases.
2. Taxes increase.
3. Businesses become less optimistic about the future.
4. The labor force increases.
5. Costs of production increase.

Question 13

When aggregate demand meets aggregate supply in the horizontal portion of the aggregate supply curve,

A)a decrease in demand will cause prices to rise but no change in output.
B)a decrease in demand will cause output to rise but no change in prices.
C)a decrease in demand will cause prices to fall but no change in output.
D)a decrease in demand will cause output to fall but no change in prices.

Question 14

Which of the following is NOT one of the factors that could affect the size of the multiplier?

A)What sector of the economy receives the initial increase in spending
B)How the spending is financed
C)Whether the economy is in recession or at full employment
D)Whether the economy is in autarky equilibrium

Question 15

If a component of aggregate demand increases,

A)GDP in the United States is likely to increase less than that component of spending increased.
B)GDP in the United States is likely to increase more than that component of spending increased.
C)GDP in the United States is likely to decrease.
D)GDP in the United States will not change.

Question 16

Along the aggregate supply curve

A)the horizontal part represents a situation where the economy is operating above full employment levels.
B)inflation would be a primary concern along the horizontal part of the aggregate supply curve.
C)the horizontal section of the aggregate supply curve represents the limit of production.
D)the middle, upward-sloping part of the aggregate supply curve would be associated with a growing economy that experienced increased prices from resources that are becoming relatively scarce.

Question 17

Changes in aggregate demand

A)could be caused by changes in the spending decisions of foreigners.
B)are unlikely to change quickly in response to economic events.
C)are primarily based on changes in firms' abilities to produce products.
D)are not affected by changes in government policies.

Question 18

Government spending and taxes

A)do not change aggregate demand.
B)are an important component of aggregate supply.
C)do not play a big role in determining GDP.
D)are a major determinant of aggregate demand.

Question 19

Which of the following would cause an increase in aggregate supply?

A)An increase in factors of production
B)An increase in foreign demand for goods
C)A decrease in productivity
D)An increase in government spending

Question 20

When the economy is using all of its factors of production,the aggregate supply curve is vertical.

Question 21

Which of the following correctly explains how expansionary monetary policy works?

A)G↑ ⇒ C↑ ⇒ Y↑
B)T↑ ⇒ C↑ ⇒ Y↑
C)M↑ ⇒ i↓ ⇒ I↑ ⇒ Y↑
D)M↑ ⇒ i↓ ⇒ I↓ ⇒ Y↑

Question 22

All of the following make the use of fiscal policy less attractive except

A)that it cannot be effective unless it is accommodated with expansionary monetary policy.
B)the substantial margin of error in the value of the multiplier.
C)the legislative lag, which is the time it takes for Congress and the President to pass and implement the measure.
D)the crowding out effect, which is the decrease in private spending that occurs due to increased government spending.

Question 23

Expansionary monetary policy involves an increase in the money supply and a fall in interest rates,leading to a positive expansion in income.

Question 24

Explain how exchange rate policies affected economies during the Great Depression.

Question 25

When a central bank sells bonds,cash reserves throughout the financial system increase,interest rates fall,and investment spending increases.

Question 26

Which of the following correctly explains how expansionary fiscal policy works?

A)G↑ ⇒ C↑ ⇒ Y↑
B)T↑ ⇒ C↑ ⇒ Y↑
C)M↑ ⇒ i↓ ⇒ I↑ ⇒ Y↑
D)M↑ ⇒ i↓ ⇒ I↓ ⇒ Y↑

Question 27

Contractionary fiscal policy attempts to shift aggregate demand to the right.

Question 28

Fiscal policy can be implemented more quickly than monetary policy.

Question 29

Starting from a balanced budget,which of the following would NOT cause a government budget deficit?

A)A decrease in taxes
B)An increase in spending of goods and services
C)An increase in transfer payments
D)A 50 percent increase in spending accompanied by a 50 percent increase in taxes

Question 30

Describe some of the potential problems with using expansionary fiscal policy.

Question 31

All of the following took place during the Great Depression except

A)an increase in unemployment from about 3.4 percent to about 25 percent and a decrease in real GDP by about 30 percent between 1929 in 1933.
B)an increase in taxes because of the fear that budget deficits would undermine business confidence.
C)a fall in the money supply by more than 30 percent.
D)a rise in inflation during the early 1930s.

Question 32

An example of expansionary fiscal policy would be

A)a decrease in government spending to reduce budget deficits.
B)an increase in tax collection to reduce budget deficits.
C)a decrease in interest rates to help stimulate the economy.
D)an increase in government spending on infrastructure to create jobs and improve the economy.

Question 33

Which of the following is NOT a reason why the effects of tax cuts on government spending dissipate and each additional change in consumption and income becomes smaller and smaller?

A)Some of the increase in income will be lost through taxation.
B)Some of the increase is saved and does not result in an increase in consumer demand.
C)Some of the increase in consumption will be an additional demand for imported goods.
D)Some of the increase is used for business investment.

Question 34

The gold standard was helpful in stabilizing economies during the Great Depression.

Question 35

Which of the following is an advantage of monetary policy?

A)It is faster to implement than fiscal policy.
B)It acts more directly upon aggregate demand than fiscal policy.
C)It is not subject to multiplier effects.
D)It is unlikely to create inflation.

Question 36

Which of the following may NOT serve as a possible chain reaction for either fiscal or monetary policy?

A)G↑ ⇒ Y↑ ⇒ C↑ ⇒ Y↑ ⇒ C↑....
B)T↓ ⇒ Y↑ ⇒ C↑ ⇒ Y↑ ⇒ C↑....
C)M↑ ⇒ i↓ ⇒ I↓ ⇒ Y↓ ⇒ C↓....
D)M↑ ⇒ i↓ ⇒ I↑ ⇒ Y↑ ⇒ C↑....

Question 37

Which of the following is an example of expansionary monetary policy?

A)Open market purchases of bonds
B)A decrease in government spending
C)A decrease in taxes
D)An increase in interest rates

Question 38

The recent trend internationally has been for the executive and legislative branches of elected governments to get more control over monetary policy,as has been the case in countries such as the United States.

Question 39

Fiscal policy is

A)the selling of government bonds by the Treasury.
B)the deliberate manipulation of the money supply designed to affect the interest rate.
C)the deliberate manipulation of taxation and spending designed to affect the economy.
D)the selling of foreign exchange reserves designed to change the exchange rate.

Question 40

If aggregate supply meets aggregate demand in the vertical part of the AS curve,which of the following is a true statement about expansionary policies?

A)Monetary policy will be more effective in increasing output.
B)Fiscal policy will be more effective in increasing output.
C)Fiscal and monetary policy will be equally effective in increasing output.
D)Both monetary and fiscal policies will only cause prices to increase.

Question 41

Which of the following correctly shows the relationship between savings,the government budget balance,and the current account?

A)S + CA = I + (T -G)
B)S + CA = I + (T + G)
C)S + (T - G)= I + CA
D)S + (T + G)= I + CA

Question 42

Monetary policy is more effective in an open economy than in a closed economy.

Question 43

If the government has a $100 million budget deficit,private saving is equal to $500 million,private investment is equal to $300 million,what is the value of the current account in equilibrium?

A)$100 million surplus
B)$700 million surplus
C)$100 million deficit
D)$700 million deficit

Question 44

Which of the following is FALSE concerning the long run?

A)Economists believe that fiscal and monetary policies have no permanent effects on the economy.
B)Economists more or less agree that the economy tends to fluctuate around the level that is consistent with full employment.
C)In the long run, the unemployment rate returns to its normal level.
D)The current account must tend toward balance in the long run.
E)None of the above.

Question 45

Carefully explain why monetary policy is likely to be more effective in a open economy than fiscal policy.

Question 46

In most cases,expenditure-switching policies must be accompanied by expenditure-reducing policies because

A)expenditure-switching policies are completely ineffective without expenditure-reducing policies.
B)inflation ensues as home country domestic expenditures switch away from foreign goods to domestic goods unless overall expenditures are reduced.
C)inflation abroad may increase the demand for domestic goods, causing inflation to rise.
D)the depreciation in the exchange rate may decrease the domestic price of foreign goods, causing an increase in the current account deficit.

Question 47

If interest rates rise,what will happen to the nation's exchange rate?

Question 48

Which of the following correctly describes the relationship between savings,the government budget balance,and the current account?

A)Private savings plus the government budget balance must equal private investment plus the current account.
B)Private savings plus the current account must equal private investment plus the government budget surplus or deficit.
C)Private savings plus private investment must equal the current account plus the government budget balance.
D)Private investment must equal private savings plus the current account minus the government budget balance.

Question 49

Expansionary monetary policy is likely to lead to a depreciation of the nation's currency.

Question 50

An increase in interest rates causes that nation to experience an outflow of financial capital and causes its currency to depreciate.

Question 51

Describe the policies a nation would follow to correct a current account deficit.What are the primary purposes of each type of policy?

Question 52

Fiscal policy does not have an effect on interest rates.

Question 53

Explain why in an economy with fixed exchange rates,monetary policy will not cause expenditure switching.

Question 54

Describe the difficult choices in macroeconomic policy that Argentina faced in the late 1990s.

Question 55

Contractionary fiscal policy can lead to a depreciation of the nation's currency.

Question 56

A depreciation of the currency can switch spending away from foreign goods and reduce the effect of rising incomes on the current account.

Question 57

The J-curve effect that results from currency depreciation results is due to

A)the initial effect having positive effects on the current account balance.
B)the value of imports increasing by more than the value of exports at the time of devaluation.
C)exports and imports being totally unresponsive to changes in exchange rates.
D)decreases in the dollar price of imports.

Question 58

Expansionary fiscal policy is likely to lead a nation's currency to depreciate.

Question 59

Expenditure switching refers to

A)a switching back and forth between investment and consumption expenditures.
B)a switching back and forth between domestic and foreign goods in response to changes in the exchange rate.
C)a switching back and forth between domestic and foreign goods in response to changes in the interest rate.
D)a switching of back and forth in the current account from a deficit to a surplus and vice versa.

Question 60

How does expansionary monetary policy affect a nation's exchange rate?

Question 61

The J-curve shows that,after a currency depreciation,

A)the current account is likely to worsen before it improves.
B)the current account is likely to improve before it worsens.
C)the current account will remain unchanged after all adjustments have taken place.
D)the current account is difficult to change in the long run.

Question 62

Which of the following would NOT be a reason why developed nations would try to coordinate their macroeconomic policies?

A)To achieve a desirable level of world economic growth
B)To avoid imposing a disproportionate burden on one major country in its attempt to help other world economies
C)To stimulate production in other countries using the higher incomes generated by policy coordination
D)To coordinate retaliatory policies on developing countries' trade barriers

Question 63

It is more certain how expansionary monetary policy will affect the current account than how expansionary fiscal policy will affect it.

Question 64

During the worldwide recession of 2007-2009,

A)the Fed and the European Central Bank worked together.
B)all countries coordinated macroeconomic policies.
C)nations sacrificed some sovereignty.
D)the IMF coordinated world economic policies.

Question 65

How is an exchange rate depreciation likely to affect imports and exports in the short run and over a longer period of time?

Question 66

All of the following are possible explanations for why it took so long for trade balances to respond to the depreciation of the dollar except

A)the prior increase in the value of the dollar had padded the profit margins of foreign producers.
B)foreign trade barriers made it impossible for the United States to substantially expand exports it bought.
C)there were still impacts from earlier appreciations working through the system.
D)exports began to increase from a much lower base than imports.

Question 67

Coordination of macroeconomic policies between nation is uncommon.

Question 68

Explain why macroeconomic policies that are coordinated can enhance economic growth,but why policies that are not coordinated can increase global imbalances.

Question 69

Expenditure switching policies are best used on their own.

Question 70

Explain why expenditure switching and expenditure reducing policies need to be used together.

Question 71

Use a J-curve to illustrate the effect on the current account of an exchange rate depreciation.Explain why the curve has the shape that it does.

Question 72

If a currency rapidly depreciates,what are the possible negative results to the economy of using contractionary monetary policy to address the depreciation?

Question 73

Which of the following is NOT a likely goal of macroeconomic coordination between nations?

A)Reducing trade barriers
B)Achieving a desirable level of world economic growth
C)Avoiding a global economic crisis
D)Correcting global economic imbalances

Question 74

Expenditure-switching policies designed to improve a current account deficit

A)turn domestic spending towards domestic goods.
B)reduce the overall level of demand in the economy.
C)turn domestic spending towards foreign goods.
D)increase the overall level of demand in the economy.

Question 75

Which nations make up the G8?

Question 76

When macroeconomic policies are not coordinated,

A)macroeconomic policies will not be effective.
B)expansionary policies in one country are likely to increase global imbalances.
C)worldwide recessions are likely.
D)low-income countries cannot grow.

Question 77

A common response to stop a depreciation of a currency is to use contractionary monetary policy,which could lead to a recession.

Question 78

Used alone,an expenditure-reducing policy that lowers aggregate demand

A)will not reduce the current account deficit.
B)is likely to cause a recession.
C)will be likely to increase the current account deficit.
D)is likely to increase domestic inflation.

Question 79

Expenditure-reducing policies designed to improve a current account deficit

A)turn domestic spending towards domestic goods.
B)reduce the overall level of demand in the economy.
C)turn domestic spending towards foreign goods.
D)increase the overall level of demand in the economy.

Question 80

Used alone,an expenditure-switching policy that turns spending from foreign goods to domestic goods

A)will not reduce the current account deficit.
B)is likely to cause a recession.
C)will be likely to increase the current account deficit.
D)is likely to increase domestic inflation.