International Economics, 9e (Husted/Melvin)
Chapter 17 Open-Economy Macroeconomics
17.1 Multiple-Choice Questions
1) Which of the following would not cause the IS curve to shift to the left?
A) a decrease in government expenditures
B) a decrease in the money supply
C) an increase in the domestic price level
D) an increase in taxes
2) The LM curve represents combinations of income and interest rate which
A) clear the goods market.
B) achieve the external equilibrium.
C) clear the money market.
D) achieve internal equilibrium.
3) A point to the left of the BP curve would represent
A) a balance of payments deficit.
B) a balance of payments surplus.
C) internal disequilibrium.
D) Both A and C.
4) An increase in the money supply would
A) shift the LM curve to the left.
B) shift the IS curve to the right.
C) shift the IS curve to the left.
D) shift the LM curve to the right.
5) A point to the left of the LM curve would represent a situation in which
A) money demand is greater than money supply.
B) money supply is greater than money demand.
C) money demand is greater than goods demand.
D) money demand is less than goods demand.
6) Which of the following is not a true statement?
A) The higher the income level, the lower interest rates must be for goods market equilibrium.
B) The higher the income level, the higher interest rates must be for money market equilibrium.
C) The higher the income level, the lower the interest rate must be for external balance to be
achieved.
D) Equilibrium occurs at the intersection of the IS, LM, and BP curves.
7) As interest rates rise, other things equal,
A) investment decreases.
B) money demand decreases.
C) capital inflows increase.
D) All of the above.
8) With fixed exchange rates, perfect asset substitutability, and perfect capital mobility
A) the LM curve is horizontal.
B) the LM curve is vertical.
C) the BP curve is horizontal.
D) the BP curve is vertical.
9) With fixed exchange rates, perfect asset substitutability, and perfect capital mobility
A) fiscal policy is ineffective.
B) monetary policy is ineffective.
C) both fiscal and monetary policy are effective.
D) both fiscal and monetary policy are ineffective.
10) With flexible exchange rates, perfect asset substitutability, and perfect capital mobility,
expansionary monetary policy will cause
A) income to rise, interest rates to fall, and the domestic currency to depreciate.
B) income to fall, interest rates to rise, and the domestic currency to appreciate.
C) income to rise, interest rates to remain unchanged, and the domestic currency to appreciate.
D) income to rise, interest rates to remain unchanged, and the domestic currency to depreciate.
11) Which of the following is not a necessary condition for a flat BP curve?
A) perfect capital mobility
B) perfect asset substitutability
C) fixed exchange rates
D) floating exchanges rates
E) Both C and D
12) The world of flexible exchange rates and perfect capital mobility is often called the
A) Keynesian model.
B) Mundell-Fleming model.
C) Monetarist model.
D) Melvin model.
13) Complete crowding out occurs when
A) monetary policy has no effect on income.
B) fiscal policy has no effect on income.
C) monetary policy has no effect on interest rates.
D) fiscal policy has no effect on interest rates.
14) With floating exchange rates
A) monetary policy is effective.
B) fiscal policy is ineffective.
C) monetary and fiscal policy are effective.
D) fiscal and monetary policy are ineffective.
15) Internal balance describes
A) equilibrium in the goods market.
B) a desired level of trade or capital flows.
C) where the IS and BP curve intersect.
D) a domestic rate of growth consistent with a low unemployment rate.
16) Many economists argue that the sharp reduction in U.S. net exports in the mid 1980s was due
to
A) expansionary U.S. monetary policy.
B) contractionary U.S. monetary policy.
C) expansionary U.S. fiscal policy.
D) contractionary U.S. fiscal policy.
17) If foreign countries simultaneously stimulate their economies rather than follow independent
policies
A) world interest rates would rise and the pressure for exchange rate change would fall.
B) world interest rates would rise and the pressure for exchange rate change would rise.
C) world interest rates would fall and the pressure for exchange rate change would fall.
D) world interest rates would fall and the pressure for exchange rate change would rise.
18) If the United States follows an expansionary monetary policy relative to Japan and Germany,
which of the following is not likely to occur?
A) U.S. interest rates will rise relative to Japan and Germany
B) a larger U.S. capital account deficit
C) a depreciation of the dollar
D) lower level of U.S. income
19) External balance refers to
A) an economy which is on its LM curve.
B) an economy which is on its IS curve.
C) an economy which is on its BP curve.
D) All of the above.
20) With fixed exchange rates, a country
A) cannot conduct independent monetary policy.
B) can conduct independent monetary policy.
C) cannot conduct independent fiscal policy.
D) Both A and C.
21) This refers to an increase in government spending that produces a reduction in private
spending
A) crowding out.
B) investment disappointment.
C) social loss.
D) deadweight loss.
22) The stimulation of a large economy aimed at increasing growth in the rest of the world is
commonly known as
A) pass-through effect.
B) locomotive effect
C) investment effect.
D) domino effect.
23) Which of the following statements about the financial crisis that began in 2008 is true?
A) It was a great illustration of how interdependent national economies are.
B) Most economists agree that it originated in China.
C) It only lasted 3 weeks.
D) It only affected housing markets.
24) Which of the following would cause the IS curve to shift to the left?
A) an increase in government expenditures
B) a decrease in the money supply
C) an increase in domestic investment
D) a decrease in taxes
25) Which of the following would cause the LM curve to shift to the right?
A) increased money supply
B) a larger U.S. capital account deficit
C) a depreciation of the dollar
D) lower level of U.S. income
17.2 True or False Questions
1) Internal balance can be graphically represented as the intersection of the IS curve with the LM
curve.
2) Points to the left of the IS curve represent excess demand for goods.
3) The LM curve will shift to the right when government expenditures increase.
4) The BP curve is upward sloping if assets are perfectly substitutable.
5) Fiscal policy is most effective when exchange rates are fixed.
6) At higher income levels the interest rate must be lower to achieve money market equilibrium.
7) Monetary policy is most effective at home when exchange rates are flexible.
8) With perfect asset substitutability and capital mobility the domestic interest rate is equal to the
foreign rate.
9) The BP curve presents combinations of y and i that yield balance of trade equilibrium.
10) The goal of international economic policy cooperation is to allow for greater flexibility in
exchange rates.
11) The global financial crisis that began in 2008 was a great illustration of how interdependent
national economies are.
12) During the global financial crisis of 2008-2009, it appeared that overt global policy
coordination was not practiced, but countries were all following similar policies, such as
decreasing interest rates.
13) The open-economy multiplier is equal to the reciprocal of the marginal propensity to save.
17.3 Essay Questions
1) What policies would you recommend to the U.S. government to lower the balance of trade
deficit and decrease net capital inflows?
2) Illustrate with a graph the effects of monetary policy on the economy when exchange rates are
flexible.
3) Illustrate with a graph the effects of fiscal policy when exchange rates are fixed.
4) What was the Plaza Agreement about?
5) Illustrate the effectiveness of monetary policy with fixed exchange rates.
6) Analyze the following statement “the global financial crisis of 2008-2009 was a great
illustration of how interdependent national economies are.”