International Economics, 6e (Gerber)
Chapter 11 An Introduction to Open Economy Macroeconomics
11.1 Introduction: The Macroeconomy in a Global Setting
1) There are no questions for this section.
Topic: Introduction: The Macroeconomy in a Global Setting
11.2 Aggregate Demand and Aggregate Supply
1) Which of the following is TRUE?
A) Points along the aggregate supply curve show the equilibrium levels of output and prices that
are consistent on the demand side of the economy.
B) Points along the aggregate demand curve show the equilibrium levels of output and prices
that are consistent on the supply side of the economy.
C) Aggregate demand shows the levels of GDP and prices where expenditure decisions and
production decisions match.
D) Aggregate supply shows the levels of GDP and prices where expenditure decisions and
production decisions match.
2) Along the aggregate supply curve
A) the horizontal part represents a situation where the economy is operating above full
employment levels.
B) inflation would be a primary concern along the horizontal part of the aggregate supply curve.
C) idle resources, such as labor and capital, would be a feature of the vertical section of the
aggregate supply curve.
D) the horizontal section of the aggregate supply curve represents the limit of production.
E) the middle, upward-sloping part of the aggregate supply curve would be associated with a
growing economy that experienced increased prices from resources that are becoming relatively
scarce.
3) Changes in aggregate demand
A) could be caused by changes in the spending decisions of the households, businesses, the
government, and foreigners.
B) are very uncommon.
C) are unlikely to change quickly in response to economic events.
D) are primarily based on changes in firms’ abilities to produce products.
E) are not affected by changes in government policies.
4) Intermediate inputs are
A) goods used for household consumption only.
B) goods used for government consumption only.
C) goods purchased by one business from another to use in production.
D) goods purchased by foreigners.
E) raw materials used in the production process.
5) If consumption spending increases because people feel more confident about the future,
A) aggregate demand will shift to the left.
B) aggregate demand will shift to the right.
C) aggregate supply will shift to the left.
D) aggregate supply will shift to the right.
6) Suppose the Asian financial crisis decreased U.S. exports. In the aggregate demand/aggregate
supply model, this would be represented as
A) a shift to the right of aggregate supply, which would result in more production for the U.S.
economy.
B) a shift to the left of aggregate supply, which would result in less production for the U.S.
economy.
C) a shift to the right of aggregate demand, leading to more spending and production in the U.S.
economy.
D) a shift to the left of aggregate demand, leading to less spending and production in the U.S.
economy.
7) Economic growth would be illustrated by
A) a rightward shift of aggregate demand.
B) a leftward shift of aggregate demand.
C) a rightward shift of aggregate supply.
D) a leftward shift of aggregate supply.
8) When aggregate demand increases,
A) the price level is likely to rise as GDP rises.
B) the price level is likely to fall as GDP rises.
C) aggregate supply will shift to the right.
D) aggregate supply will shift to the left.
9) If a component of aggregate demand increases,
A) GDP in the United States is likely to increase less than that component of spending increased.
B) GDP in the United States is likely to increase more than that component of spending
increased.
C) GDP in the United States is likely to decrease.
D) GDP in the United States will not change.
10) When spending and incomes in an economy increase,
A) imports are likely to increase.
B) imports are likely to be unchanged.
C) imports are likely to decrease.
D) exports are likely to decrease.
11) Government spending and taxes
A) do not change aggregate demand.
B) are an important component of aggregate supply.
C) do not play a big role in determining GDP.
D) are a major determinant of aggregate demand.
E) cannot affect the price level.
12) Which of the following is NOT one of the factors your text identifies that could affect the
size of the multiplier?
A) What sector of the economy receives the initial increase in spending
B) How the spending is financed
C) Whether the economy is in recession or at full employment
D) Whether the economy is in autarky equilibrium
13) For any given increase in spending that is not directly caused by an increase in income, the
impact on equilibrium GDP is greater than the initial spending increase.
14) Taxes, savings, and imports tend to magnify the effect of any spending change in the
economy; that is, if investment spending initially increases, then spending will grow even more
as taxes, savings, and imports increase, so the economic growth will accelerate.
15) What typically happens to imports as income and spending rise?
11.3 Fiscal and Monetary Policies
1) Fiscal policy is
A) the selling of government bonds by the Treasury.
B) the deliberate manipulation of the money supply designed to affect the interest rate.
C) the deliberate manipulation of taxation and spending designed to affect the economy.
D) the selling of foreign exchange reserves designed to change the exchange rate.
E) All of the above.
2) Which of the following may NOT serve as a possible chain reaction for either fiscal or
monetary policy?
A) G↑ ⇒ Y↑ ⇒ C↑ ⇒ Y↑ ⇒ C↑....
B) T↓ ⇒ Y↑ ⇒ C↑ ⇒ Y↑ ⇒ C↑….
C) M↑ ⇒ i↓ ⇒ I↓ ⇒ Y↓ ⇒ C↓….
D) M↑ ⇒ i↓ ⇒ I↑ ⇒ Y↑ ⇒ C↑….
E) M↓ ⇒ i↑ ⇒ I↓ ⇒ Y↓ ⇒ C↓….
3) Starting from a balanced budget, which of the following would NOT cause a deficit?
A) A decrease in taxes
B) An increase in spending of goods and services
C) An increase in transfer payments
D) A 50 percent increase in spending accompanied by a 40 percent increase in taxes
E) None of the above.
4) The effects of tax cuts or government spending dissipate and each additional change in
consumption and income becomes smaller and smaller because
A) some of the increase in income will be lost through taxation.
B) some of the increase is saved and does not result in an increase in consumer demand.
C) some of the increase in consumption will be an additional demand for imported goods.
D) All of the above.
E) None of the above.
5) All of the following make the use of fiscal policy less attractive EXCEPT
A) expansionary fiscal policy tends to cause inflation and offsets some of the increased consumer
spending.
B) that it cannot be effective, unless it is accommodated with expansionary monetary policy.
C) the substantial margin of error in the value of the multiplier.
D) the legislative lag, which is the time it takes for Congress and the President to pass and
implement the measure.
E) the crowding out effect, which is the decrease in private spending that occurs due to increased
government spending.
6) All of the following took place during the Great Depression EXCEPT
A) increase in unemployment from about 3.4 percent to about 25 percent and a decrease in real
GDP by about 30 percent between 1929 in 1933.
B) an increase in taxes because of the fear that budget deficits would undermine business
confidence.
C) a fall in the money supply by more than 30 percent.
D) a rise in inflation during the early 1930s.
E) the stock market crashed by about one-third in October of 1929.
7) An example of expansionary fiscal policy would be
A) a decrease in government spending to reduce budget deficits.
B) an increase in tax collection to reduce budget deficits.
C) a decrease in interest rates to help stimulate the economy.
D) an increase in government spending on infrastructure to create jobs and improve the
economy.
E) an increase in interest rates to encourage private savings.
8) The recent trend internationally has been for the executive and legislative branches of elected
governments to get more control over monetary policy, as has been the case in countries such as
the United States.
9) Contractionary fiscal policy attempts to shift aggregate demand to the right.
10) When a central bank sells bonds, cash reserves throughout the financial system increase,
interest rates fall, and investment spending increases.
11) Expansionary monetary policy involves an increase in the money supply and a fall in interest
rates, leading to a positive expansion in income.
12) Describe some of the potential problems with using expansionary fiscal policy.
11.4 Current Account Balances Revisited
1) Expenditure switching refers to
A) a switching back and forth between investment and consumption expenditures.
B) a switching back and forth between domestic and foreign goods in response to changes in the
exchange rate.
C) a switching back and forth between domestic and foreign goods in response to changes in the
interest rate.
D) a switching of back and forth in the current account from a deficit to a surplus and vice versa.
E) All of the above.
2) Which of the following is FALSE concerning the long run?
A) Economists believe that fiscal and monetary policies have no permanent effects on the
economy.
B) Economists more or less agree that the economy tends to fluctuate around the level that is
consistent with full employment.
C) In the long run, the unemployment rate returns to its normal level.
D) The current account must tend toward balance in the long run.
E) None of the above.
3) Contractionary fiscal policy can lead to a depreciation of the nation’s currency.
4) Expansionary fiscal policy is likely to lead a nation’s currency to depreciate.
5) Expansionary monetary policy is likely to lead to a depreciation of the nation’s currency.
6) An increase in interest rates causes that nation to experience an outflow of financial capital
and causes its currency to depreciate.
7) Describe the policies a nation would follow to correct a current account deficit. What are the
primary purposes of each type of policy?
8) Describe the difficult choices in macroeconomic policy that Argentina faced in the late 1990s.
9) If interest rates rise, what will happen to the nation’s exchange rate?
10) How does expansionary monetary policy affect a nation’s exchange rate?
11.5 Macro Policies for Current Account Imbalances
1) In most cases, expenditure-switching policies must be accompanied by expenditure-reducing
policies because
A) expenditure-switching policies are completely ineffective without expenditure-reducing
policies.
B) inflation ensues as home country domestic expenditures switch away from foreign goods to
domestic goods unless overall expenditures are reduced.
C) inflation abroad may increase the demand for domestic goods, causing inflation to rise.
D) the depreciation in the exchange rate may decrease the domestic price of foreign goods,
causing an increase in the current account deficit.
E) None of the above.
2) The J-curve effect of a currency depreciation results is due to
A) the initial effect having positive effects on the current account balance.
B) the value of imports increasing by more than the value of exports at the time of devaluation.
C) exports and imports being totally unresponsive to changes in exchange rates.
D) decreases in the dollar price of imports.
E) None of the above.
3) All of the following are possible explanations for why it took so long for trade balances to
respond to the depreciation of the dollar EXCEPT
A) the prior increase in the value of the dollar had padded the profit margins of foreign
producers.
B) foreign trade barriers made it impossible for the United States to substantially expand exports
it bought.
C) there were still impacts from earlier appreciations working through the system.
D) exports began to increase from a much lower base than imports.
E) None of the above. That is, A, B, C, and D are all correct.
4) A common response to stop a depreciation of a currency is to use contractionary monetary
policy, which could lead to a recession.
5) It is more certain how expansionary monetary policy will affect the current account than how
expansionary fiscal policy will affect it.
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6) If a currency rapidly depreciates, what are the possible negative results to the economy of
using contractionary monetary policy to address the depreciation?
7) How is an exchange rate depreciation likely to affect imports and exports in the short run and
over a longer period of time?
11.6 Macroeconomic Policy Coordination in Developed Countries
1) Which of the following would NOT be a reason why developed nations would try to
coordinate their macroeconomic policies?
A) To achieve a desirable level of world economic growth
B) To avoid imposing a disproportionate burden on one major country in its attempt to help other
world economies
C) To stimulate production in other countries using the higher incomes generated by policy
coordination
D) To coordinate retaliatory policies on developing countries’ trade barriers
E) None of the above. That is, A, B, C, and D are all correct.