Deck 16: The Price Adjustment Mechanism With Flexible and Fixed Exchange Rates

Question 1

A depreciation of a nation's currency shifts:

A) down its supply curve of exports in terms of the domestic currency
B) down its supply curve of exports in terms of the foreign currency
C) down its demand curve for exports in terms of the foreign currency
D) up its supply curve of imports in terms of the foreign currency

Answer 1

B

Question 2

The foreign exchange market is stable when:

A) The demand curve of foreign exchange is negatively inclined and the supply curve of foreign exchange is positively inclined
B) the supply curve of foreign exchange is negatively inclined and less elastic than the demand curve
C) the sum of the absolute values of the elasticity of the nation's demand of imports and the foreign demand for the nation's exports is greater than one
D) all of the above

Answer 2

D

Question 3

When a nation's demand curve for imports in terms of the foreign currency is vertical:

A) the nation's demand curve for the foreign currency has zero elasticity
B) the nation's demand for the currency is elastic
C) the nation's supply of the currency is vertical
D) the other nation's demand for the nation's currency has zero elasticity

Answer 3

A

Question 4

The Marshall-Lerner condition indicates that

A) if the sum of the price elasticities of the demand for imports and the demand for exports exceeds 1 the foreign exchange market will be stable.
B) if the sum of the price elasticities of the demand for imports and the demand for exports exceeds 1 the foreign exchange market will be unstable.
C) if the net differential between the price elasticities of the demand for imports and the demand for exports exceeds 1 the foreign exchange market will be stable.
D) if the net differential between the price elasticities of the demand for imports and the demand for exports exceeds 1 the foreign exchange market will be unstable.

Question 5

For a small nation:

A) the foreign supply of exports is horizontal
B) the domestic demand for imports is horizontal
C) the foreign demand for its exports is horizontal
D) the foreign supply of exports is vertical

Question 6

Which of the following statements is not true with regard to the price-specie-flow mechanism:

A) relies on the quantity theory of money
B) requires that nations allow their money supply to rise when the nation has a surplus in its balance of payments and to fall when the nation has a deficit
C) requires that the price elasticity of demand for imports and exports be equal to zero
D) it was introduced by David Hume to show the futility of the mercantilists' prescription that a nation should attempt to continuously accumulate gold

Question 7

A nation's demand curve for foreign exchange is derived from the:

A) foreign demand curve for the nations' exports
B) nation's supply curve of exports
C) domestic demand curve for imports and the foreign supply curve for the nation's imports
D) foreign demand curve and the domestic supply curve for the nation's exports

Question 8

David Hume was responsible for introducing

A) the gold standard
B) the analysis of the J-curve
C) the price-specie-flow mechanism
D) none of the above

Question 9

Under the gold standard:

A) each nations defines the price of gold in terms of its currency and then stands ready to buy and sell any amount of gold at that price
B) there is a fixed relationship between any two currencies called the mint parity
C) the exchange rate is determined by demand and supply between the gold points and is prevented from moving outside the gold points by gold shipments
D) all of the above

Question 10

A depreciation of the nation's currency causes its terms of trade to:

A) deteriorate
B) improve
C) remain unchanged
D) any of the above

Question 11

When increase in the domestic price of an imported commodity is less than the depreciation of the domestic currency it is commonly referred to as

A) a Marshall-Lerner adjustment
B) a purchasing power parity adjustment
C) a currency pass-through
D) a J-curve effect

Question 12

The mint parity refers to the:

A) gold export point
B) gold import point
C) equilibrium exchange rate
D) ratio of the price of a unit of gold in terms of the currency of two nations

Question 13

The United States has a trade problem with Japan because the U.S.trade deficit with Japan:

A) is very large
B) has persisted for a long time
C) did not seem to decline when the dollar depreciated sharply with respect to the yen
D) all of the above

Question 14

According to the quantity theory of money,if the velocity of money and physical output are held constant,and increase in the money supply will lead to

A) a proportional decrease in the price level
B) a proportional increase in the price level
C) no change in the price level
D) all of the above are possible outcomes

Question 15

A depreciation of a nation's currency is:

A) inflationary for the nation
B) deflationary for the nation
C) deflationary for the trade partner
D) any of the above

Question 16

A currency board refers to the case where:

A) the central bank sterilizes changes in the money supply resulting from balance of payments disequilibria
B) the money supply of the nation is backed by 100 percent international reserves
C) the nation operates under flexible exchange rates
D) the nation retains firm control over its money supply

Question 17

A depreciation of a nation's currency shifts:

A) down its supply curve of imports in terms of the foreign currency
B) up its demand curve of imports in terms of the foreign currency
C) down its demand curve of imports in terms of the foreign currency
D) down its demand curve of imports in terms of the domestic currency

Question 18

When a nation's demand curve for exports in terms of the foreign currency is inelastic:

A) the nation's supply curve of the foreign currency is negatively inclined
B) the nation's supply curve of the foreign currency is vertical
C) the nation's demand curve for the foreign currency is negatively inclined
D) the other nation's supply curve of the nation's currency is negatively inclined

Question 19

The gold standard operated from

A) about 1880 until the outbreak of World War I
B) about 1880 until the outbreak of World War II
C) about 1500 until the outbreak of World War I
D) about 1500 until the outbreak of World War II

Question 20

The more elastic is a nation's demand and supply of foreign exchange the:

A) larger is the devaluation or depreciation required to correct a deficit of a given size in the nation's balance of payments
B) smaller is the devaluation or depreciation required to correct a deficit of a given size in the nation's balance of payments
C) less feasible is a flexible exchange rate system
D) less feasible is devaluation as a policy to correct a deficit in the nation's balance of payments

Question 21

Suppose that under the gold standard,the price of gold is set at $30/ounce in the United States and ₤15/ounce in the United Kingdom.What are the gold import and export points if there is a 10% cost of shipping gold?

Question 22

Suppose that under the gold standard,the price of gold is set at $40/ounce in the United States and ₤15/ounce in the United Kingdom.What is the exchange rate between the dollar and the pound if there is no cost to ship gold?

Question 23

Explain why currency pass-through is not likely to be complete.

Question 24

Which of the following is a true statement?

A) A currency depreciation will be passed along completely as an increase in import prices.
B) A currency depreciation may or may not result in an increase in import prices.
C) A currency depreciation will not be passed along into input prices.
D) A currency depreciation will result in lower import prices.

Question 25

What are the necessary elasticity conditions for a stable foreign exchange market?

Question 26

Research on the relationship between elasticities and the current account balance suggests that,for the United States,currency depreciation would result in:

A) a significant improvement in the current account balance.
B) no change in the current account balance.
C) a small improvement in the current account balance.
D) a worsening of the current account balance.

Question 27

Explain the meaning of the J-curve effect and exactly why a J-curve is expected to exist.

Question 28

Explain why under a gold standard exchange rate system that the market exchange rate will never deviate far from the mint parity rate.

Question 29

Suppose that a nation is at full employment without inflation but has a deficit in its balance of payments.(a)Explain why a depreciation of the nation's currency will not correct the deficit unless real output rises or domestic expenditures (absorption)fall.(b)How can the nation's output rise as a result of the depreciation? (c)How can domestic absorption fall automatically as a result of the depreciation? (d)How can the government help reduce domestic absorption and make the devaluation effective?

Question 30

When it is unclear whether a currency depreciation is permanent,exporters may choose not to raise their prices,especially if they fear losing market share in markets with existing production and distribution facilities.This is known as the:

A) market share effect.
B) beachhead effect.
C) pass-through effect.
D) parity effect.