Deck 15: Exchange Rate Systems and Currency Crises

Question 1

In a closed economy, which of the following will cause the economy's aggregate demand curve to shift to the right?

A) decreases in wages and salaries paid to employees
B) increases in the prices of oil and natural gas
C) decreases in income taxes for households
D) decreases in the productivity of labor

Answer 1

decreases in income taxes for households

Question 2

A nation experiences internal balance if it achieves

A) full employment.
B) price stability.
C) full employment and price stability.
D) unemployment and price instability.

Answer 2

full employment and price stability.

Question 3

Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary fiscal policy is implemented to combat recession.Other things equal, the initial and secondary effects of the policy

A) cause aggregate demand to increase, thus strengthening the policy's expansionary effect on real output.
B) cause aggregate demand to decrease, thus eliminating the policy's expansionary effect on real output.
C) have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real output.
D) have conflicting effects on aggregate demand, thus strengthening the policy's expansionary effect on real output.

Answer 3

have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real output.

Question 4

Suppose the United States has a fixed exchange rate, and it faces domestic recession and a trade deficit.Assuming it desires overall balance, if the United States devalues the dollar, other things equal one would expect which of the following to occur?

A) the recession to become less severe and the trade deficit to become less severe
B) the recession to become more severe and the trade deficit to become less severe
C) the recession to become less severe and the trade deficit to become more severe
D) the recession to become more severe and the trade deficit to become more severe

Question 5

Which of the following is an example of an expenditure-reducing policy?

A) a devaluation of the par value of a currency
B) a decrease in government spending
C) a decrease in import duties
D) a decrease in business taxes

Question 6

Historically, most nations generally considered _________ as the most important economic goal.

A) external balance
B) internal balance
C) overall balance
D) exchange rate stability

Question 7

Given fixed exchange rates, assume Mexico initiates contractionary monetary and fiscal policies to combat inflation.Other things equal, these policies will also

A) reduce a balance-of-payments surplus.
B) reduce a balance-of-payments deficit.
C) increase both imports and exports.
D) decrease both imports and exports.

Question 8

Which policy is an example of an expenditure-switching policy?

A) an increase in the money supply
B) a decrease in government spending
C) an increase in business taxes
D) a decrease in import tariffs

Question 9

Which of these policies are expenditure-changing policies?

A) currency devaluation and revaluation
B) import quotas and tariffs
C) monetary and fiscal policy
D) wage and price controls

Question 10

Suppose the United States has a fixed exchange rate, and it faces domestic inflation and a trade surplus.Assuming it desires overall balance, if the United States revalues the dollar, other things equal one would expect which of the following to occur?

A) inflation to become more severe and the trade surplus to become less severe
B) inflation to become less severe and the trade surplus to become less severe
C) inflation to become less severe and the trade surplus to become more severe
D) inflation to become more severe and the trade surplus to become more severe

Question 11

The appropriate expenditure-switching policy to correct a trade surplus is

A) currency revaluation.
B) currency devaluation.
C) expansionary monetary policy.
D) contractionary fiscal policy.

Question 12

A nation experiences overall balance if it achieves

A) neither deficits nor surpluses in its current account, full employment, and price stability.
B) a trade surplus, full employment, and price stability.
C) full employment, price stability, and no change in its money supply.
D) full employment, price stability, and maximum productivity.

Question 13

Suppose Brazil has a floating exchange rate, and it faces domestic inflation and a trade deficit.Assuming it desires overall balance, if Brazil shrinks its money supply, other things equal one would expect which of the following to occur?

A) inflation to become more severe and the trade deficit to become less severe, an example of policy agreement
B) inflation to become more severe and the trade deficit to become more severe, an example of policy conflict
C) inflation to become less severe and the trade deficit to become less severe, an example of policy agreement
D) inflation to become less severe and the trade deficit to become more severe, an example of policy conflict

Question 14

Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession.Other things equal, the initial and secondary effects of the policy

A) cause aggregate demand to increase, thus strengthening the policy's expansionary effect on real output.
B) cause aggregate demand to decrease, thus eliminating the policy's expansionary effect on real output.
C) have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real output.
D) have conflicting effects on aggregate demand, thus strengthening the policy's expansionary effect on real output.

Question 15

Given fixed exchange rates, assume Mexico initiates expansionary monetary and fiscal policies to combat recession.Other things equal, these policies will also

A) increase both imports and exports.
B) increase exports and reduce imports.
C) reduce a balance-of-payments surplus.
D) reduce a balance-of-payments deficit.

Question 16

The appropriate expenditure-switching policy to correct a trade deficit is

A) contractionary monetary policy.
B) expansionary fiscal policy.
C) currency devaluation.
D) currency revaluation.

Question 17

A nation experiences external balance if it achieves

A) no net changes in its international gold stocks.
B) productivity levels equal to those of its trading partners.
C) a trade surplus.
D) neither deficits nor surpluses in its current account.

Question 18

A problem that economic policy makers confront when attempting to promote both internal and external balance for the nation is that monetary or fiscal policies aimed at the domestic sector also have impacts on

A) trade flows.
B) capital flows.
C) both trade flows and capital flows.
D) None of these are correct.

Question 19

Suppose Brazil has a fixed exchange rate, and it faces domestic recession and a trade surplus.Assuming it desires overall balance, if Brazil revalues its currency, other things equal one would expect which of the following to occur?

A) the recession to become less severe and the trade surplus to become less severe
B) the recession to become more severe and the trade surplus to become more severe
C) the recession to become more severe and the trade surplus to become less severe
D) the recession to become less severe and the trade surplus to become more severe

Question 20

Which of the following is an example of an expenditure-increasing policy?

A) an increase in import tariffs
B) a decrease in import quotas
C) higher income taxes
D) an increase in the money supply

Question 21

All of the following are obstacles to international economic policy coordination except

A) different national objectives and institutions.
B) different national political climates.
C) different phases in the business cycle.
D) different national currencies.

Question 22

Exhibit 15.1

At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information.

-Refer to Exhibit 15.1.The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar's exchange value downward, the required policy may also cause

A) higher inflation in the U.S.
B) a larger budget deficit in the U.S.
C) higher unemployment in the U.S.
D) slower economic growth in the U.S.

Question 23

Under a fixed exchange-rate system and high capital mobility, other things equal an expansionary fiscal policy leads to a

A) trade deficit and capital inflow.
B) trade deficit and capital outflow.
C) trade surplus and capital inflow.
D) trade surplus and capital outflow.

Question 24

With a fixed exchange rate system and high capital mobility, internal balance is most effectively achieved by using

A) expansionary monetary policy to combat recession.
B) expansionary fiscal policy to combat recession.
C) contractionary monetary policy to combat recession.
D) contractionary fiscal policy to combat recession.

Question 25

A system of fixed exchange rates and high capital mobility strengthens which policy in combating a recession?

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

Question 26

Assume a system of floating exchange rates and high capital mobility.In response to relatively high domestic interest rates, suppose that foreign investors place their funds in domestic capital markets.The result would be

A) a depreciation of the domestic currency and a rise in net exports.
B) a depreciation of the domestic currency and a fall in net exports.
C) an appreciation of the domestic currency and a rise in net exports.
D) an appreciation of the domestic currency and a fall in net exports.

Question 27

The Plaza Agreement of 1985 and Louvre Accord of 1987 are examples of

A) tariff trade barrier formation.
B) nontariff trade barrier formation.
C) international economic policy coordination.
D) beggar-thy-neighbor policies.

Question 28

Given an open economy with high capital mobility, under a system of managed-floating exchange rates with heavy exchange rate intervention

A) fiscal policy is more successful in promoting internal balance, while monetary policy is less successful.
B) monetary policy is more successful in promoting internal balance, while fiscal policy is less successful.
C) both fiscal policy and monetary policy are equally successful in promoting internal balance.
D) neither fiscal policy nor monetary policy are successful in promoting internal balance.

Question 29

Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency.Other things equal, this also causes the

A) domestic money supply to decrease and a decline in aggregate demand.
B) domestic money supply to increase and a decline in aggregate demand.
C) domestic money supply to decrease and a rise in aggregate demand.
D) domestic money supply to increase and a rise in aggregate demand.

Question 30

Exhibit 15.1

At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information.

-Refer to Exhibit 15.1.Other things equal, to help drive the dollar's exchange value downward, the Federal Reserve would

A) reduce taxes.
B) increase taxes.
C) decrease the money supply.
D) increase the money supply.

Question 31

Given a system of floating exchange rates and high capital mobility, other things equal an expansionary monetary policy by the Federal Reserve will cause

A) the dollar to appreciate and will decrease U.S. net exports.
B) the dollar to appreciate and will increase U.S. net exports.
C) the dollar to depreciate and will increase U.S. net exports.
D) the dollar to depreciate and will decrease U.S. net exports.

Question 32

Given a system of floating exchange rates, other things equal an expansionary fiscal policy by the United States will cause

A) the dollar to appreciate and will decrease U.S. net exports.
B) the dollar to appreciate and will increase U.S. net exports.
C) the dollar to depreciate and will increase U.S. net exports.
D) the dollar to depreciate and will decrease U.S. net exports.

Question 33

Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency.Other things equal this causes the

A) domestic money supply to decrease and a decline in aggregate demand.
B) domestic money supply to increase and a decline in aggregate demand.
C) domestic money supply to decrease and a rise in aggregate demand.
D) domestic money supply to increase and a rise in aggregate demand.

Question 34

At the ________, the Group-of-Five nations agreed to intervene in the currency markets to promote a depreciation in the U.S.dollar's exchange value.

A) Plaza Agreement of 1985
B) Louvre Accord of 1987
C) Bonn Summit of 1978
D) Tokyo Summit of 1962

Question 35

Which of the following situations are likely to require direct controls to achieve overall balance?

A) when an economy is experiencing inflation with unemployment
B) when an economy is experiencing inflation with a trade deficit
C) when an economy is experiencing inflation with a trade surplus
D) when an economy is experiencing inflation with a budget deficit

Question 36

A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession?

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

Question 37

Given an open economy with high capital mobility, which of the following statements is NOT true?

A) Fiscal policy is strengthened under fixed exchange rates.
B) Monetary policy is weakened under fixed exchange rates.
C) Monetary policy is strengthened under floating exchange rates.
D) Fiscal policy is strengthened under floating exchange rates.

Question 38

Under a fixed exchange-rate system and high capital mobility, other things equal an expansion in the domestic money supply leads to a

A) trade deficit and capital inflow.
B) trade deficit and capital outflow.
C) trade surplus and capital inflow.
D) trade surplus and capital outflow.

Question 39

Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency.Other things equal this also causes the

A) domestic money supply to decrease and a decline in aggregate demand.
B) domestic money supply to increase and a decline in aggregate demand.
C) domestic money supply to decrease and a rise in aggregate demand.
D) domestic money supply to increase and a rise in aggregate demand.

Question 40

Assume a system of floating exchange rates and high capital mobility.In response to relatively high interest rates abroad, suppose domestic investors place their funds in foreign capital markets.Other things equal, the result would be

A) a depreciation of the domestic currency and a rise in net exports.
B) a depreciation of the domestic currency and a fall in net exports.
C) an appreciation of the domestic currency and a rise in net exports.
D) an appreciation of the domestic currency and a fall in net exports.

Question 41

A nation realizes internal balance if the economy achieves full employment and price stability.

Question 42

Given an open economy with high capital mobility, monetary policy is strengthened under fixed exchange rates.

Question 43

Under floating exchange rates and high capital mobility, an expansionary monetary policy would help a country resolve a recession and a current account deficit.

Question 44

A nation realizes external balance when its current account is in equilibrium, i.e.neither a trade balance nor a trade deficit.

Question 45

Suppose that Kenya uses a floating exchange rate and experiences high capital mobility.Assume that Kenya is experiencing a recession and high inflation.In order to achieve overall balance, other things equal, Kenya will likely need to implement

A) contractionary fiscal policy.
B) wage and price controls.
C) expansionary fiscal policy.
D) contractionary monetary policy.

Question 46

Given an open economy with high capital mobility and fixed exchange rates, suppose an expansionary fiscal policy is implemented to combat recession.The initial and secondary effects of the policy cause aggregate demand to increase, thus strengthening the policy's expansionary effect.

Question 47

Expenditure-changing policies modify the direction of aggregate demand, shifting it between domestic output and imports.

Question 48

A nation realizes overall balance when it achieves full employment and current account equilibrium.

Question 49

Given an open economy with high capital mobility, fiscal policy is strengthened under fixed exchange rates.

Question 50

Expenditure-switching policies include fiscal policy and monetary policy.

Question 51

Suppose that Brunei has a floating exchange rate and experiences high capital mobility.Assume that Brunei is suffering from a recession and it also has a trade deficit.Other things equal, which of the following policy options is likely to achieve overall balance for Brunei?

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

Question 52

Expenditure-switching policies alter the level of total spending (aggregate demand) for goods and services produced domestically and those imported.

Question 53

Currency devaluation and revaluation are considered to be expenditure-changing policies since they alter a country's aggregate demand for goods and services.

Question 54

Economic policymakers have typically adopted expenditure-increasing policies to combat inflation and expenditure-reducing policies to combat recession.

Question 55

Changes in a country's net exports, investment spending, or government spending will cause its aggregate demand curve to shift.

Question 56

Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession.The initial and secondary effects of the policy have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect.

Question 57

Nations have typically placed greater importance to the goal of internal balance than to the goal of external balance.

Question 58

Expenditure-switching policies include currency revaluation, currency devaluation, and direct controls such as tariffs, quotas, and subsidies.

Question 59

When the economy is in deep recession or depression, it is operating on that portion of its aggregate supply curve that is horizontal.

Question 60

Which of the following explains why the aggregate supply curve is generally upward sloping?

A) When real output decreases, per-unit production costs tend to increase.
B) When aggregate demand shifts rightward, aggregate supply also always shifts rightward as well.
C) When real output increases, per-unit production costs decrease.
D) When real output increases, per-unit production costs increase as well.

Question 61

Fiscal and monetary policies are generally used to combat domestic recession and inflation and have secondary effects on the balance of payments.

Question 62

Currency devaluation and revaluation primarily affect the economy's current account and have secondary effects on domestic employment and inflation.

Question 63

What happens to the balance of payments under a fixed exchange rate system, when expansionary or contractionary monetary policy is used?

Question 64

What is international economic policy coordination?

Question 65

The Bonn Summit of 1978 and Plaza Accord of 1985 are examples of international policy coordination.

Question 66

The Group-of-Five (G-5) nations include Japan, Germany, China, and Australia.

Question 67

The goals of the Plaza Agreement of 1985 were to combat protectionism in the U.S.Congress, to promote world economic expansion by stimulating demand in Germany and Japan, and to ease the burden of the U.S.debt service.

Question 68

International policy coordination is plagued by differing national economic objectives, institutions, political climates, and phases in the business cycle.

Question 69

Exchange rate management policies require international policy coordination because a depreciation of one nation's currency implies an appreciation of its trading partner's currency.

Question 70

What policy instrument should be used when demand-pull inflation exists?

Question 71

Was the Plaza Agreement of 1985 a success?