9) An expenditure-changing policy
A) alters the direction of the economy’s total demand for goods and services.
B) alters the level of the economy’s total demand for goods and services.
C) has no effect on aggregate demand.
D) is the same thing as an expenditure-switching policy.
E) affects aggregate supply but not aggregate demand.
10) The alteration of exchange rates to move the economy to internal and external balance may
lead to all EXCEPT
A) a balance of payments crisis.
B) changes in the terms of trade.
C) changes in the level of imports or exports.
D) changes in interest rates.
E) a guaranteed unilateral improvement in economic wealth.
11) “A monetary policy is not a policy tool under fixed exchange rates.” Discuss.
12) What is the difference between an expenditure-changing policy and an expenditure-
switching policy?
13) (a) Assume that R denotes the domestic interest rate and R denotes the foreign interest rate.
Under a fixed exchange rate what is the relation between R and R
(b) Assume E denotes the domestic currency price of the dollar for a country which is not the
United States. If one wants to analyze only the short-run effects of a policy, what does one
assume about the Home and Foreign price levels, P and P , respectively.
(c) Assume that there is no ongoing balance of payment crisis. What does this assumption
really assume?
(d) Assume a fixed exchange rate system. What does this tell you about E?
(e) Under the above assumptions what are the conditions for internal balance?
(f) How would your answer to Part D above change if P is unstable due to foreign inflation.
(g) Given the definitions above, how would one define the real exchange rate?
(h) Write the condition for internal balance.
(i) Define the variable not defined before in Part G above.
(j) Using the equation for internal balance derived above, given our assumptions analyze the
effects of a fiscal expansion.
(k) What would happen if the government of that country, which is not the United States under
Bretton Woods, decides to devaluate its currency?
(l) What would happen if the government of that country, which is not the United States under
Bretton Woods, decides to use monetary policy rather than fiscal policy?
(m) Given all of the above, what is the relation between the exchange rate, E, and fiscal ease,
i.e., an increase in G or a reduction in T?
(n) Assume that the economy is at internal balance. What will happen if G goes up for a given
level of E?
(o) Assume that the economy is at internal balance. What will happen if G goes down for a
given level of E?
23
Copyright © 2018 Pearson Education, Inc.
(m) Negative relation.
(n) Over-employment.
(o) Under employment.
Page Ref: 573-577
Difficulty: Moderate
14) Assume that the government has a target value, X, for the current account surplus.
(a) What is the goal of external balance?
(b) Assume that we are dealing with only the short run, what are the values of P and P∗?
(c) Given fixed P and P , what would happen if E rises?
(d) Given P and P , what would happen if T decreases, i.e., an expansionary fiscal policy?
(e) Given P and P , what would happen if G increases, i.e., an expansionary fiscal policy?
(f) Given all of the above, what is the relation between the exchange rate, E, and fiscal ease, i.e.,
an increase in G or a reduction in T?
(g) Assume that the economy is in external balance. What will happen if the government
maintains its current account at X, but devaluates the domestic currency?
(h) Assume that the economy is at external balance. What will happen if the government raises
E?
(i) Assume that the economy is at external balance. What will happen if the government lowers
E?
15) Use a figure below to describe the four zones of economic discomfort.
16) Using the II-XX framework, show using a figure that fiscal policies by themselves cannot
bring the economy to both internal and external balances.
1) The confidence problem of the Bretton Woods systems articulated by Robert Triffin refers to
A) the unwillingness of central banks to accumulate currency for fear of not being able to
convert it to gold in case a run on the banks occurs.
B) consumer fear of stock market instability.
C) producer fear of rising wages.
D) the lack of convertibility of gold into silver.
E) low consumer spending because of balance of payment crises.
2) In order to bring about a real depreciation of the dollar, the U.S. can hope for
A) a rise in the U.S. price level.
B) a fall in foreign price levels.
C) a rise in the dollar’s nominal value in terms of foreign currencies.
D) a rise in foreign price levels or a fall in the dollar’s nominal value in terms of foreign
currencies.
E) increased output and full employment.
3) The collapse of the Bretton Woods system marked
A) the end of floating exchange rates and a move to fixed exchange rates.
B) marked the end of fixed exchange rates and a move to floating exchange rates.
C) the beginning of the gold standard.
D) a plunge in the price of gold.
E) the elimination of paper currencies.
4) Which of the following statements is MOST accurate?
A) A revaluation restores internal and external balance immediately, without causing domestic
inflation.
B) A devaluation restores internal and external balance immediately, without causing domestic
inflation.
C) A revaluation restores internal and external balance immediately, but also causes domestic
inflation.
D) A devaluation restores internal and external balance immediately, but also causes domestic
inflation.
E) A devaluation restores external balance in the long run, without causing immediate domestic
inflation.
5) Which of the following is the MOST accurate?
A) U.S. macroeconomic policies in the late 1960s helped cause the breakdown of the Bretton
Woods system by early 1973.
B) U.S. macroeconomic policies in the late 1970s helped cause the breakdown of the Bretton
Woods system by early 1983.
C) U.S. macroeconomic policies in the late 1980s helped cause the breakdown of the Bretton
Woods system by early 1993.
D) U.S. macroeconomic policies in the late 1950s helped cause the breakdown of the Bretton
Woods system by early 1963.
E) U.S. macroeconomic policies in the late 1960s delayed the breakdown of the Bretton Woods
system to early 1973.
6) Refer to the graph below, which shows the effect of ________ on the home economy.
A) foreign inflation
B) domestic inflation
C) foreign deflation
D) domestic recession
E) foreign recession
7) Refer to the graph below. The movement from point 1 to point 2 is stimulated by a
disequilibrium in which there is domestic ________ and ________.
A) overemployment; trade surplus
B) unemployment; trade surplus
C) overemployment; trade deficit
D) unemployment; trade deficit
E) inflation; unemployment
1) Advocates of floating rate suggested it is favorable for economies for all of the following
reasons EXCEPT
A) it discourages attack from foreign exchange speculators because of the fact that exchange rate
adjustment is immediate.
B) it helps stabilize the shock effect on unemployment in case of economic changes such as a fall
in export demand.
C) it automatically matches the domestic inflation with ongoing foreign inflation.
D) it gives every country the opportunity to guide its own monetary conditions at home.
E) it brings the LR exchange rate to the level predicted by PPP without government policy
decisions.
2) Which of the following is NOT a result of a temporary fall in foreign demand on one
country’s exports under floating exchange rate?
A) The DD curve shifts to the left due to reduction of aggregate demand.
B) The AA curve shifts downwards due to reduction of money supply.
C) a fall in aggregate output
D) depreciation in home country’s currency
E) a fall in the home interest rate
3) Which of the following is NOT a result of a permanent fall in foreign demand on one
country’s exports under floating exchange rate?
A) The DD curve shifts to the left due to reduction of aggregate demand.
B) The AA curve shifts upwards due to the increased expected long-run exchange rate.
C) a reduction in output by a smaller degree compared to temporary fall in demand
D) depreciation in home country’s currency
E) a raised level of unemployment
4) If central banks were no longer obliged to intervene in currency markets to fix exchange rates,
governments would be able to use monetary policy to reach
A) internal balance.
B) external balance.
C) internal and external balance.
D) internal but not external balance.
E) external but not internal balance.
5) Advocates of flexible exchange rates claim that under flexible exchange rates
A) no country would be forced to import only inflation from abroad.
B) no country would be forced to import only deflation from abroad.
C) no country would be forced to import inflation and deflation from abroad.
D) flexible exchange rates are not able to halt importing inflation from abroad.
E) flexible exchange rates are not able to halt importing deflation from abroad.
6) Advocates of flexible exchange rates claim that under flexible exchange rates
A) the United States would now be able to set world monetary conditions all by itself.
B) Germany would no longer be able to set world monetary conditions all by itself.
C) the United Kingdom would no longer be able to set world monetary conditions all by itself.
D) the United States would no longer be able to set world monetary conditions all by itself.
E) Germany would now be able set world monetary conditions all by itself.
7) Advocates of flexible exchange rates claim that under flexible exchange rates
A) the United States would no longer have the same opportunity as other countries to influence
its exchange rate against foreign currencies.
B) the United States would have the same opportunity as other countries to influence its
exchange rate against foreign currencies.
C) the United Kingdom would not have the same opportunity as other countries to influence its
exchange rate against foreign currencies.
D) Germany would not have the same opportunity as other countries to influence its exchange
rate against foreign currencies.
E) China would have the same opportunity as other countries to influence its exchange rate
against foreign currencies.
8) Some claim that the long and agonizing periods of speculation preceding exchange rate
realignments would
A) not occur under a fixed exchange rate regime.
B) not occur under floating.
C) become more severe under currency board.
D) become less severe under floating.
E) be prolonged under floating.
9) Advocates of floating rates pointed out that
A) removal of the obligation to peg currency values would restore monetary control to central
banks.
B) imposing of the obligation to peg currency values would restore monetary control to central
banks.
C) removing of the obligation to peg currency values would restore fiscal control.
D) imposing of the obligation to peg currency values would restore fiscal control.
E) imposing of the obligation to peg currency would restore monetary control to the consumer.
10) Advocates of flexible exchange rates claim that under flexible exchange rates, if the central
bank faced unemployment
A) and thus wished to decrease its money supply, there would no longer be any legal barrier to
the currency depreciation this would cause.
B) and thus wished to expand its money supply, there would no longer be any legal barrier to the
currency depreciation this would cause.
C) and wished to expand its money supply, there would no longer be any legal barrier to the
currency appreciation this would cause.
D) and wished to decrease its money supply, there now would be a legal barrier to the currency
depreciation this would cause.
E) and wished to increase output, there would no longer be a legal barrier to the currency
appreciation this would cause.
11) Advocates of flexible exchange rates claim that under flexible exchange rates, a currency
A) appreciation caused by increasing the money supply would reduce unemployment by
lowering the relative price of domestic products.
B) depreciation caused by increasing the money supply would increase unemployment by
lowering the relative price of domestic products.
C) depreciation caused by increasing the money supply would reduce unemployment by
lowering the relative price of domestic products.
D) depreciation caused by increasing the money supply would reduce unemployment by
increasing the relative price of domestic products.
E) depreciation cause by decreasing the money supply would not effect unemployment, but
would increase the relative price of domestic products.
12) Advocates of flexible exchange rates claim that under flexible exchange rates, a currency
A) depreciation caused by increasing the money supply would reduce unemployment by
increasing world demand for them.
B) appreciation caused by increasing the money supply would reduce unemployment by
increasing world demand for them.
C) appreciation caused by decreasing the money supply would reduce unemployment by
increasing world demand for them.
D) appreciation caused by increasing the money supply would increase unemployment by
increasing world demand for them.
E) appreciation caused by increasing the money supply would increase unemployment by
decreasing world demand for them.
13) Advocates of flexible exchange rates claim that under flexible exchange rates, a currency
A) depreciation caused by increasing the money supply would reduce unemployment by
lowering the relative price of domestic products and increasing the world demand for them.
B) appreciation caused by increasing the money supply would reduce unemployment by
lowering the relative price of domestic products and increasing world demand for them.
C) appreciation caused by decreasing the money supply would reduce unemployment by
lowering the relative price of domestic products and increasing world demand for them.
D) appreciation caused by increasing the money supply would increase unemployment by
lowering the relative price of domestic products and increasing world demand for them.
E) appreciation caused by increasing the money supply would increase unemployment by
lowering the relative price of domestic products and by decreasing world demand for them.
14) Advocates of flexible exchange rates claim that under flexible exchange rates, the central
bank of
A) an overheated economy could cool down activity by increasing the money supply without
worrying that undesired reserve inflow would undermine its stabilization effort.
B) a cooled economy could cool down activity by contracting the money supply without
worrying that undesired reserve inflow would undermine its stabilization effort.
C) an overheated economy could cool down activity by contracting the money supply without
worrying that undesired reserve inflow would undermine its stabilization effort.
D) an overheated economy could cool down activity by contracting the money supply without
worrying that undesired reserve outflow would undermine its stabilization effort.
E) an overheated economy could cool down activity by decreasing employment and increasing
output without worrying that this would undermine its stabilization effort.
15) Advocates of flexible exchange rates claim that under flexible exchange rates
A) enhanced control over fiscal policy would allow countries to dismantle their distorting
barriers to international payments.
B) reduced control over monetary policy would allow countries to dismantle their distorting
barriers to international payments.
C) enhanced control over monetary policy would allow countries to increase their distorting
barriers to international payments.
D) enhanced control over monetary policy would allow countries to dismantle their distorting
barriers to international payments.
E) enhanced control over monetary policy would destabilize exchange rates.
16) By the end of the 1960s, many countries felt that they were importing inflation from
A) the United States.
B) Germany.
C) France.
D) Japan.
E) the United Kingdom.
17) Which one of the following statements is TRUE?
A) By devaluing its currency, that is, by lowering the domestic currency price of foreign
currency, a country can insulate itself completely from an inflationary increase in foreign prices.
B) By revaluing its currency, that is, by increasing the domestic currency price of foreign
currency, a country can insulate itself completely from an inflationary increase in foreign prices.
C) By revaluing its currency, that is, by lowering the domestic currency price of foreign
currency, a country cannot insulate itself completely from an inflationary increase in foreign
prices.
D) By revaluing its currency, that is, by lowering the domestic currency price of foreign
currency, a country can insulate itself completely from an inflationary increase in foreign prices.
E) By revaluing its currency, that is, by lowering the domestic currency price of foreign
currency, a country cannot insulate itself completely from a harmful decrease in foreign prices.
18) When all changes in the world are due to
A) fiscal policy, purchasing power parity holds true in the long run.
B) monetary policy, purchasing power parity does not hold true in the long run.
C) monetary policy, purchasing power parity holds true in the long run.
D) monetary policy, purchasing power parity holds true even in the short run.
E) fiscal and monetary policy, purchasing power parity holds true in the long run.
19) Federal Reserve Chairman Volcker’s policy to fight inflation
A) led to the 1981-1983 recession, but was ultimately successful.
B) led to the 1981-1983 recession, but did not end high inflation due to beggar-thy-neighbor
effects.
C) was perfectly complemented by Reagan’s decrease in fiscal spending.
D) led to the 1981-1983 recession and foretold the economic downturn in the mid-1990s.
E) led to an immediate depreciation of the dollar.
20) Under purchasing power parity (PPP), if U.S. monetary growth leads to a long run doubling
of the U.S. price level, while Germany’s price level remains constant, PPP predicts that the
A) long-run DM price of the dollar will be doubled.
B) long-run DM price of the dollar will be halved.
C) long-run DM price of the dollar will remain the same.
D) short-run DM price of the dollar will be halved.
E) short-run DM price of the dollar will be doubled.
21) Under flexible exchange rate regime, a money-induced
A) decrease in U.S. prices causes an immediate appreciation of the foreign currencies against the
dollar.
B) increase in U.S. prices causes an immediate appreciation of the foreign currencies against the
dollar.
C) increase in U.S. prices causes an eventual appreciation of the foreign currencies against the
dollar.
D) increase in U.S. prices causes an eventual depreciation of the foreign currencies against the
dollar.
E) decrease in U.S. prices causes no change in foreign exchange rate.
22) Under Bretton Woods,
A) any foreign country cannot devalue its currency against the dollar in conditions of
“fundamental disequilibrium.”
B) any foreign country could devalue its currency against the dollar in conditions of
“fundamental disequilibrium,” but the system’s rules did not give the United States the option of
devaluing against foreign currencies.
C) any foreign country could devalue its currency against the dollar in conditions of
“fundamental disequilibrium,” and the system’s rules did give the United States the same option
of devaluing against foreign currencies.
D) the U.S. could devalue its currency against the foreign currencies in conditions of
“fundamental disequilibrium.”
E) any foreign country can revalue its currency against the dollar in conditions of “fundamental
disequilibrium.”