Question 1

The final market price of imports may not reflect 100% of changes in the real effective exchange rate because:

Accepted Answer

A)  exchange rates in many nations are fixed. 
B)  there are restrictions on capital inflows. 
C)  domestic price distortions, such as markups or taxes, reduce the impact of the exchange rate change. 
D)  the government has instituted price controls.

Question 2

If the supply of money increases, what happens in the IS-LM framework?

Accepted Answer

A)  The IS curve shifts right. 
B)  The LM curve shifts right. 
C)  The IS curve shifts left. 
D)  The LM curve shifts left.

Question 3

When a depreciation in the nation's real effective exchange rate initially lowers the trade balance and then increases it, economists refer to the phenomenon as:

Accepted Answer

A)  the K curve effect. 
B)  the J curve effect. 
C)  the real balances effect. 
D)  the marginal propensity to import.

Question 4

When the real exchange rate decreases in the United States, then there is a(n) ______ in U.S. demand for U.S. goods and a(n) _________ in U.S. demand for Mexican goods.

Accepted Answer

A)  decrease; increase 
B)  increase; decrease 
C)  increase; increase 
D)  decrease; decrease

Question 5

Assume the economy is in equilibrium. If the interest rate falls, what sequence of events will return the economy to equilibrium?

Accepted Answer

A)  Total spending rises as investors move funds into foreign assets, causing the exchange rate to rise (depreciate), and the trade balance increases, causing output to rise. 
B)  Savers save more to replace lost interest earnings, consumption falls, imports rise, and the trade balance falls, causing output to fall. 
C)  Total spending falls, unemployment rises, government transfers increase, inflation rises, and the exchange rate falls (appreciates). 
D)  Bond prices rise, causing foreign investment to flow in, causing the exchange rate to fall (appreciate).

Question 6

At some rate of interest, i, domestic demand is equal to output, and at some exchange rate, the domestic return is equivalent to the foreign return. This must be one point on:

Accepted Answer

A)  the IS curve. 
B)  the aggregate expenditure line. 
C)  the supply curve. 
D)  the LM curve.

Question 7

With expected inflation equal to zero in the model, investment activity for an economy is:

Accepted Answer

A)  a positive function of the nominal rate of interest. 
B)  a negative function of the nominal rate of interest. 
C)  constant in the face of differing nominal rates of interest. 
D)  limited to the rate of growth of nominal GDP minus the inflation rate.

Question 8

Suppose that the dollar real exchange rate falls by 10% against the euro, 20% against the pound, and 25% against the yen. If the United States trades equally with each country, what is the percentage decline in the real effective exchange rate?

Accepted Answer

A)  22.5% 
B)  18.3% 
C)  15.1% 
D)  20.3%

Question 9

If taxes fall and foreign income falls, what will happen to output, ceteris paribus?

Accepted Answer

A)  It will rise. 
B)  It will stay the same. 
C)  It will fall. 
D)  It is uncertain what will happen.

Question 10

When the marginal propensity to consume foreign imports (MPCF) rises, ceteris paribus, what happens to the trade balance?

Accepted Answer

A)  It increases. 
B)  It decreases. 
C)  It depends on what happens to the MPC of domestic goods. 
D)  It will not change.

Question 11

When the interest rate is so low that the opportunity cost of holding money is zero, then economists say we have reached:

Accepted Answer

A)  the era of total liquidity. 
B)  the zero lower bound situation, which means the U.S. economy may be in a liquidity trap. 
C)  full monetary saturation. 
D)  a situation in which a nation must use caution, since monetary policy is "super" effective.

Question 12

What assumption results in investment depending only on the nominal interest rate?

Accepted Answer

A)  rationality 
B)  zero expected inflation 
C)  uncertainty 
D)  The MPC is less than 1.

Question 13

There are a number of factors that can increase demand and affect the equilibrium level of total output and, therefore, affect the trade balance. Discuss several of these and indicate in which direction total demand would change, and in which direction the trade balance would change.

Accepted Answer

The answer of There are a number of factors that...

Exam 18: Balance of Payments II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run