Chapter 15 : Managing Short-Run Crises in an Open Economy
MULTIPLE CHOICE
1. During the 1970s, 1980s, and 1990s, many economies became unbalanced because of:
a.
the expansion of the WTO.
b.
the emergence of NAFTA and the EU as powerful reenergized economic forces.
c.
world market conditions and macroeconomic mismanagement.
d.
China’s emergence as a new global economic power.
2. The two main policy approaches for correcting macroeconomic imbalances are:
a.
changes in aggregate expenditure and adjustments to the exchange rate.
b.
changes in expenditure and price controls.
c.
adjustments to the exchange rate and price controls.
d.
price controls and trade restrictions.
3. For purposes of macroeconomic analysis, a country is small when:
a.
its population is less than 20 million.
b.
it is a price taker in world markets for its exports and imports.
c.
its macroeconomic imbalances have no significant effect on other countries.
d.
its domestic economy is not significantly influenced by international trade and financial
flows.
4. Which of the following should be classified as a nontradable?
a.
rural road construction services
b.
wheat production wholly consumed within the country
c.
computer equipment that cannot be produced locally
d.
all of the above
5. The domestic price of a tradable good is determined by which equation?
a.
Pt = e/P*t
c.
Pt = eP*t
b.
Pt = P*t/e
d.
Pt = e –P*t
6. If the world price of cotton is $.75 per pound and Mexico’s exchange rate is 14 pesos per dollar, then
the peso price of cotton in Mexico (in the absence of distortionary policies) is:
a.
P.08 per pound.
c.
P10.5 per pound.
b.
P.125 per pound.
d.
P8 per pound.
7. The defining characteristic of equilibrium in the Australian model is that:
a.
the economy is operating on its production frontier.
b.
the market for nontradables is in equilibrium.
c.
the market for tradables is in equilibrium.
d.
both the market for nontradables and the market for tradables are in equilibrium.
8. In terms of national income accounting concepts, absorption is defined as GNP:
a.
plus imports minus exports.
b.
plus exports minus imports.
c.
plus imports plus exports.
d.
minus investment expenditures minus exports.
9. A depreciation of the real exchange rate (as defined in the Australian model) means that the:
a.
price of tradables rises relative to the price of nontradables.
b.
price of tradables fall relative to the price of nontradables.
c.
official exchange rate (defined as local currency per unit of foreign currency) falls.
d.
official exchange rate rises more slowly than the average price of nontradables.
10. At any point to the left of the EB line in the phase diagram:
a.
there is inflationary pressure.
b.
there is an external surplus.
c.
fiscal and monetary policies are too loose.
d.
all of the above.
11. Starting from disequilibrium in both markets, an increase in absorption will cause:
a.
the supply curve to shift to the left for both tradables (T) and nontradables (N).
b.
the demand curve to shift to the right for both T and N.
c.
the demand curve to shift to the right for N and to the left for T.
d.
no shifts in the curves, but the economy moves to a position of inflation and external
deficit.
12. Starting from an equilibrium in both markets, an increase in absorption will cause:
a.
the supply curve to shift to the left for both tradables (T) and nontradables (N).
b.
the demand curve to shift to the right for both T and N.
c.
the demand curve to shift to the right for N and to the left for T.
d.
no shift in the curves, but the economy moves to a position of inflation and external
surplus.
13. Which of the following events will cause the external-balance line in the phase diagram to shift to the
left?
a.
an appreciation of the exchange rate
b.
a decline in the interest rate on foreign debt
c.
a decline in the absorption
d.
a decline in export earnings
14. Which of the following is a self-correcting tendency in the market when an economy is in the
inflation-and-deficit zone?
a.
The loss of foreign exchange reserves compels the government to impose price controls
and trade controls.
b.
The macroeconomic imbalances cause international lenders to increase the interest rate on
the country’s external debt.
c.
Domestic inflation reduces the real exchange rate.
d.
All of the above.
15. Using the exchange rate as an anchor for an adjustment program means:
a.
letting the market set the nominal exchange rate.
b.
maintaining a crawling peg such that the real exchange rate remains fixed.
c.
fixing the official, nominal exchange rate.
d.
imposing strict controls over foreign exchange transactions.
16. An unexpected feature of Chile’s stabilization program in the 1970s was that:
a.
export growth was weak after the real exchange rate appreciated.
b.
the economy stabilized without requiring fiscal austerity.
c.
the market’s self-correcting mechanisms worked smoothly and quickly to eliminate the
imbalances.
d.
inflation stayed high despite tight monetary policy and a big drop in the fiscal deficit.
17. For an economy suffering from high inflation and a large external deficit, the standard prescription for
stabilization entails fiscal:
a.
austerity to reduce demand and an appreciation of the exchange rate.
b.
austerity to reduce demand and a real appreciation.
c.
stimulus to expand supply and a real devaluation.
d.
stimulus to expand supply and a real appreciation.
18. For an economy that is experiencing internal balance with a large deficit, which package of
stabilization measures is warranted?
a.
a real devaluation, with no changes in absorption
b.
a real appreciation, with no change in absorption
c.
a real devaluation, with fiscal austerity
d.
a real appreciation, with fiscal austerity
19. If the world price of tradables remains unchanged while the official exchange rate rises by 20 percent
and domestic prices for nontradables rise by 50 percent, then the real exchange rate (as defined in the
Australian model):
a.
rises by 30 percent.
c.
falls by 20 percent.
b.
falls by 30 percent.
d.
rises by 70 percent.
20. The onset of the Dutch disease in represented in the Australian model as a shift of the external-balance
(EB) line to the:
a.
left.
b.
right.
c.
left combined with a shift of the internal-balance (IB) line to the left.
d.
right combined with a shift of the IB line to the left.
MSC: Factual
SHORT ANSWER
IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in
pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two
terms and (2) the relationship between them.
1. Tradable goods, real exchange rate
ANS:
Answer will vary
2. Nontradable goods, absorption
ANS:
Answer will vary
3. Official exchange rate, devaluation
ANS:
Answer will vary
4. Fiscal policy, austerity
ANS:
Answer will vary
5. Internal balance, external balance
ANS:
Answer will vary
6. Stabilization program, crawling-peg exchange rate regime
ANS:
Answer will vary
7. International Monetary Fund, balance of trade
ANS:
Answer will vary
8. Exchange-rate anchor, monetary policy
ANS:
Answer will vary
9. Phase diagram, self-correcting tendencies
ANS:
Answer will vary
10. Small economy, open economy
ANS:
Answer will vary