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Q:
If, other things being equal, a country with a flexible exchange rate increases its money supply, this will lead to _____ in the value of the country's currency, which will tend to _____ national income.
a. a depreciation; increase
b. a depreciation; decrease
c. an appreciation; increase
d. an appreciation; decrease
Q:
Considering the internal balance in an economy, which of the following could lead to lower interest rate and higher income?
a. An increase in government spending
b. A depreciation of domestic currency
c. An increase in money supply
d. A decrease in money supply
Q:
Figure 13.2 Refer to Figure 13.2. In a flexible exchange rate regime, if an economy is experiencing external disequilibrium at point B, then the domestic currency will: a. depreciate, shifting the IS curve to the right. b. depreciate, shifting the IS curve to the left. c. appreciate, shifting the IS curve to the right. d. appreciate, shifting the LM curve to the left.
Q:
Figure 13.2 Refer to Figure 13.2. In a fixed exchange rate regime, if an economy is experiencing external disequilibrium at point B, then to peg the exchange rate the central bank has to: a. buy domestic currency, sell foreign currency, and shift the IS to the left. b. buy foreign currency, sell domestic currency, and shift the LM to the right. c. buy domestic currency, sell foreign currency, and shift the LM to the left. d. buy foreign currency, sell domestic currency, and shift the IS to the right.
Q:
Figure 13.2 Refer to Figure 13.2. Starting from an equilibrium point A, if the IS curve shifts to the left to IS2, a. there will be official settlement deficit which pressures the domestic currency to depreciate. b. there will be official settlement deficit which pressures the domestic currency to appreciate. c. there will be official settlement surplus which pressures the domestic currency to depreciate. d. there will be official settlement surplus which pressures the domestic currency to appreciate.
Q:
Figure 13.2 Refer to Figure 13.2. Starting from an equilibrium point A, which of the following factors would cause the IS curve to shift to the left. a. A tax cut b. A decrease in money supply c. An increase in money supply d. A decrease in government spending
Q:
Using the IS-LM-BP model with the perfect capital mobility assumption to answer this question. Which of the following statements is TRUE?
I. In a floating exchange rate regime, fiscal policy is effective in stimulating income.
II. In a floating exchange rate regime, monetary policy is effective in stimulating income.
a. Only I is true.
b. Only II is true.
c. Both I and II are true
d. Neither I nor II is true.
Q:
In a fixed exchange rate regime, assuming perfect capital mobility, if China increases government spending to stimulate the economy, which of the following would happen in China?
a. Capital account deficit
b. A decrease in money supply
c. Official settlement surplus
d. A decrease in domestic output
Q:
An economy starts in an equilibrium condition in three markets under flexible exchange rate regime and perfect capital mobility. If the central bank in a foreign country increases its interest rate, what would happen in the domestic country?
a. domestic currency depreciates and the IS curve shifts to the right.
b. domestic currency appreciates and the IS curve shifts to the left.
c. domestic currency depreciates and the LM curve shifts to the right.
d. domestic currency appreciates and the LM curve shifts to the left.
Q:
Under an assumption of perfect capital mobility, suppose that international investors perceive the U.S. assets to be riskier than other countries during the Great Recession of 2008-09. The BP curve for the U.S would:
a. have upward slope.
b. have downward slope.
c. shift downward by the distance of risk premium.
d. shift upward by the distance of risk premium.
Q:
When the Fed decreases money supply, the LM curve shifts:
a. to the left, causing domestic interest rate to rise.
b. to the left, causing domestic interest rate to fall.
c. to the right, causing domestic interest rate to rise.
d. to the right, causing domestic interest rate to fall.
Q:
When the domestic currency appreciates, the IS curve shifts:
a. to the left, causing domestic interest rate to rise.
b. to the left, causing domestic interest rate to fall.
c. to the right, causing domestic interest rate to rise.
d. to the right, causing domestic interest rate to fall.
Q:
With perfect substitutability and perfect capital mobility, the domestic interest rate is equal to the foreign interest rate.
Q:
The factor that shifts the BP curve is a change in perception of asset substitutability.
Q:
The LM curve represents all the points where money supplied is equal to money demanded.
Q:
The balance of payments equilibrium is where the willingness to hold money is equal to the quantity of money supply.
Q:
The internal and external equilibrium occurs when the IS curve crosses the LM curve above the BP curve.
Q:
Due to the potential for dueling fiscal policies and sharp movements in exchange rates, some countries have pursued:
a. International policy coordination.
b. Protectionist tariffs
c. Isolationism policies
d. World bank trade agreements
Q:
Assume perfect capital mobility and floating exchange rates. Then, if the central bank increases money supply, the domestic currency will _______ and cause the IS curve to ________.
a. Appreciate, shift to the right
b. Appreciate, shift to the left
c. Depreciate, shift to the right
d. Depreciate, shift to the left
Q:
Assume perfect capital mobility and floating exchange rates. If the government runs a budget deficit, the domestic currency will _______ and cause the IS curve to ________.
a. Appreciate, shift to the right
b. Appreciate, shift to the left
c. Depreciate, shift to the right
d. Depreciate, shift to the left
Q:
Assume perfect capital mobility and fixed exchange rates. If the central bank increases money supply, it must also ________, which will ________.
a. Buy foreign currency, have no effect on the money supply
b. Buy foreign currency, increase the money supply
c. Buy domestic currency, increase the money supply
d. Buy domestic currency, decrease the money supply
Q:
Suppose that the government uses an expansionary fiscal policy. Then:
a. The IS curve shifts right
b. The IS curve shifts left
c. The LM curve shifts right
d. The LM curve shifts left
Q:
Suppose the central bank pursues restrictive monetary policy. Then:
a. The IS curve shifts right
b. The IS curve shifts left
c. The LM curve shifts right
d. The LM curve shifts left
Q:
Suppose that the government runs a budget surplus. Then:
a. The IS curve shifts right
b. The IS curve shifts left
c. The LM curve shifts right
d. The LM curve shifts left
Q:
Suppose the central bank increases the money supply. Then:
a. The IS curve shifts right
b. The IS curve shifts left
c. The LM curve shifts right
d. The LM curve shifts left
Q:
If the capital is perfectly immobile (due to restrictions), then the BP curve is:
a. Horizontal
b. Vertical
c. Downward-sloping
d. Upward-sloping
Q:
With floating exchange rates, a country can use _______ to alter domestic income.
a. Fiscal policy
b. Monetary policy
c. Currency devaluations
d. Currency appreciation
Q:
With fixed exchange rates, a country cannot conduct ________ to alter domestic income.
a. Fiscal policy
b. Monetary policy
c. Currency devaluations
d. Currency appreciation
Q:
Typically, the LM curve is:
a. Horizontal
b. Vertical
c. Downward-sloping
d. Upward-sloping
Q:
A change in fiscal policy shifts the:
a. IS curve
b. LM curve
c. BP curve
d. None of the above
Q:
A change in the riskiness of countrys assets shifts the:
a. IS curve
b. LM curve
c. BP curve
d. None of the above
Q:
A change in the monetary policy shifts the:
a. IS curve
b. LM curve
c. BP curve
d. None of the above
Q:
The ________ represents all the points where money supplied is equal to money demanded.
a. IS curve
b. LM curve
c. BP curve
d. None of the above
Q:
Typically, the IS curve is:
a. Horizontal
b. Vertical
c. Downward-sloping
d. Upward-sloping
Q:
When the leakages are ________ the injections, then the value of income received from producing goods and services will equal to total spending.
a. Greater than
b. Less than
c. Equal to
d. The sum of
Q:
The following curves represent an equilibrium in which markets? Match the curves with the type of equilibrium.
I. Money market equilibrium
II. Balance of payments equilibrium
III. Goods market equilibrium
a. IS, BP, LM
b. LM, BP, IS
c. BP, IS, LM
d. LM, IS, BP
Q:
Which of the following is not one of the three equilibrium conditions in an IS-LM-BP model?
a. Goods market equilibrium
b. Balance of payments equilibrium
c. Currency equilibrium
d. Money market equilibrium
Q:
Under fixed exchange rates, when a central bank increases money supply, it first shifts the LM curve to the ______ and later shifts ______.
a. left; the LM curve to the right.
b. left; the IS curve to the right.
c. right; the LM curve to the left.
d. right; the IS curve to the right.
Q:
Suppose that North Korea has closed off its capital market from the rest of the world. No resident is allowed to invest outside North Korea and no foreigner is allowed to invest in North Koreas capital market. In this case, the BP curve will be:
a. upward-sloping curve
b. downward-sloping curve
c. horizontal curve
d. vertical curve
Q:
Use this graph to answer questions 21 and 22. Figure 13.3: Using Figure 13.3, if a country experiences less than perfect capital mobility, the BP curve has a shape like: a. BPA b. BPB c. BPC d. BPD
Q:
Which of the following factors shifts the LM curve to the left?
a. An increase in money supply
b. An decrease in money supply
c. An increase in government spending
d. A depreciation of domestic currency
Q:
The IS curve represents the __________, while the LM curve represents the _________.
a. foreign exchange market; money market
b. foreign exchange market; bond market
c. goods and services market; foreign exchange market
d. goods and services market; money market
Q:
With flexible exchange rates, a decrease in money supply by a central bank causes the domestic interest rate to _______ , official settlements _______, and the domestic currency to _______. As a result, the IS curve will shift to bring the domestic interest rate to be equal to foreign interest rates.
a. fall; deficit; depreciate
b. rise; deficit; depreciate
c. rise; surplus; appreciate
d. fall; surplus; appreciate
Q:
If, other things being equal, a country with a flexible exchange rate decreases its money supply, this will lead to _____ in the value of the country's currency, which will tend to _____ national income.
a. a depreciation; increase
b. a depreciation; decrease
c. an appreciation; increase
d. an appreciation; decrease
Q:
If the Fed decreases money supply,
a. the IS curve will shift to the right.
b. the IS curve will shift to the left.
c. the LM curve will shift to the right.
d. the LM curve will shift to the left.
Q:
A theory based on the relationship of domestic spending for domestic goods relative to domestic output is known as the elasticities approach.
Q:
Assume that U.S. imports are contracted in foreign currency and the U.S. exports are
contracted in domestic currency. If the dollar is devalued, then the balance of trade will become more negative.
Q:
Domestic currency devaluation always improves the balance of trade in the short run.
Q:
The responsiveness of quantity to changes in price refers to elasticity.
Q:
Relative prices only change when demand and supply for individual goods shift outwards.
Q:
Under the absorption approach, if the economy is below full employment, then it is best to improve the trade balance by:
a. Cutting government spending by eliminating programs
b. Cutting household spending by raising taxes on goods
c. Cutting household income by raising taxes on income
d. Increasing domestic production through devaluation
Q:
One way absorption theory can be seen in practice is:
a. The J-Curve
b. Currency contracts
c. Black markets
d. IMF conditionality
Q:
Assume that the U.S. demand for imports is perfectly inelastic. If the dollar is devalued then the total import value (in dollars) will:
a. Increase
b. Decrease
c. Stay the same
d. Uncertain
Q:
Assume that the supply of foreign production is perfectly inelastic. If the dollar is devalued then the total import value (in dollars) will:
a. Increase
b. Decrease
c. Stay the same
d. Uncertain
Q:
Assume that a country is at full employment and wants to improve its trade deficit by
devaluing its currency. Using the absorption approach which of the following methods will improve the trade deficit?
I. Increase government spending
II. Increase consumption taxes
III. Increase income taxes
a. I and II
b. I and III
c. II and III
d. None
Q:
If the domestic currency is devalued and both export and import contracts are written in foreign currency, then the trade balance will:
a. Increase
b. Decrease
c. Stay the same
d. Uncertain
Q:
How must currency contracts be structured for a currency devaluation to have a worsening effect on the balance of trade?
a. Export contracts in domestic currency and import contracts in foreign currency
b. Export contracts in foreign currency and import contracts in domestic currency
c. Both contracts in domestic currency
d. Both contracts in foreign currency
Q:
Assume that U.S. imports are contracted in foreign currency and the U.S. exports are
contracted in domestic currency. If the dollar is devalued, then the balance of trade will:
a. Become more negative
b. Become more positive
c. Stay the same
d. Not possible to answer with the given information
Q:
Suppose the dollar is devalued. If an export contract is written in dollars, then the value of U.S. exports:
a. Decrease
b. Increase
c. Stay the same
d. Not possible to answer with the given information
Q:
Suppose the dollar is devalued. If an import contract is written in dollars, then the value of U.S. imports:
a. Decrease
b. Increase
c. Stay the same
d. Not possible to answer with the given information
Q:
When the demand is ________, an increase in price will increase the total revenue.
a. Elastic
b. Inelastic
c. Contracted
d. Expanded
Q:
When a country ________, it supplies foreign exchange as payment.
a. Imports
b. Exports
c. Borrows
d. Lends
Q:
Elasticity refers to
a. The ability of the demand curve to shift in and out
b. The degree by which the demand curve includes other markets
c. The responsiveness of quantity to changes in price
d. The rate that quality increases as prices increase
Q:
What is a relative price?
a. The price of a good relative to another.
b. The price of a goods complement.
c. The price ratio of exports to imports.
d. The price of a goods substitute.
Q:
The elasticities approach to the balance of trade is concerned with how:
a. Currency pegs alter the market for imports and exports.
b. Government deficits influence the balance of trade.
c. The balance of trade is altered by changing relative prices of domestic and foreign goods.
d. The ratio of domestic spending to domestic production influences the balance of trade.
Q:
At the full-employment level, if the domestic absorption remains constant, the currency devaluation will not change the balance of trade.
Q:
The Marshall-Lerner condition indicates that if the sum of absolute values of the elasticities of demand for imports and demand for exports is greater than one, a currency devaluation will fail to improve the balance of trade.
Q:
The pass-through analysis considers the elasticity of demand and supply resulting in an inability for people to adjust in the short run.
Q:
The absorption approach to the balance of trade is concerned with how changing relative prices of domestic and foreign goods will change the balance of trade.
Q:
The J-curve effect could be a result of currency contract period and pass-through price adjustment.
Q:
The following statement is supported by what concept? Allowing the devaluation of currency will improve balance of trade if we allow domestic spending by households, businesses, and government or total GDP to adjust appropriately.
a. Absorption theory
b. Elasticities theory
c. J-Curve effect
d. Disequilibrium approach
Q:
Assume that the supply of U.S. exports is perfectly inelastic. If the dollar is devalued then the total export value (in dollars) will:
a. Increase
b. Decrease
c. Stay the same
d. Uncertain
Q:
Assume that foreign demand for U.S. exports is perfectly inelastic. If the dollar is devalued then the total export value (in dollars) will:
a. Increase
b. Decrease
c. Stay the same
d. Uncertain
Q:
Assume that a country is at full employment and wants to improve its trade deficit by
devaluing its currency. Using the absorption approach which of the following methods will improve the trade deficit?
I. Decrease government spending
II. Decrease consumption taxes
III. Decrease income taxes
a. I only
b. II only
c. II and III
d. I, II, and III
Q:
If the sum of absolute values of the elasticities of demand for imports and demand for exports is greater than one, a currency devaluation could:
a. Improve the balance of trade
b. Further damage the balance of trade
c. Restore balance of trade equilibrium
d. Nothing can be determined with the given information.
Q:
If the domestic currency is devalued and both export and import contracts are written in the domestic currency, then the trade balance will:
a. Increase
b. Decrease
c. Stay the same
d. Uncertain
Q:
How must currency contracts be structured for a currency devaluation to have an improvement on the balance of trade?
a. Export contracts in domestic currency and import contracts in foreign currency
b. Export contracts in foreign currency and import contracts in domestic currency
c. Both contracts in domestic currency
d. Both contracts in foreign currency
Q:
Assume that U.S. imports and exports both have inelastic supply. If the dollar is devalued, then the balance of trade will:
a. Become more negative
b. Become more positive
c. Stay the same
d. Not possible to answer
Q:
Suppose the dollar is devalued. If an export contract is written in a foreign currency, then the value of U.S. exports:
a. Decrease
b. Increase
c. Stay the same
d. Not possible to answer with the given information
Q:
Suppose the dollar is devalued. If an import contract is written in a foreign currency, then the value of U.S. imports:
a. Decrease
b. Increase
c. Stay the same
d. Not possible to answer with the given information