File: Chapter 36 Macro Policy in a Global Setting
True/False
[QUESTION]
1. A higher exchange rate value of the dollar reduces inflation but has a contractionary effect on
the economy.
2. A country that runs a trade surplus increases current consumption at the expense of future
consumption.
3. In the short run, the net effect of an expansionary monetary policy is a lower trade deficit.
4. Expansionary fiscal policy increases income, which increases imports and hence the size of
the trade deficit.
5. Monetary and fiscal policies have little effect on the trade deficit.
6. Contractionary fiscal policy in the United States reduces domestic income, prices, and interest
rates, so the exchange rate will decrease.
7. If Japan adopts an expansionary monetary policy, U.S. exports are likely to increase.
8. Contractionary fiscal policy in the United States will increase the Japanese trade surplus.
9. Crowding out can be avoided temporarily if the government’s debt is internationalized.
10. The economic goals about which there is a substantial agreement include all the following
except:
A. a high level of employment.
B. a low rate of inflation.
C. a high rate of economic growth.
D. a large trade surplus.
11. When the euro rose relative to the dollar in the early 2000s, it:
A. encouraged European imports and exports.
B. discouraged European imports and exports
C. encouraged European imports and discouraged European exports.
D. discouraged European imports and encouraged European exports.
12. What is the primary benefit to the United States of a high price for the dollar in the foreign
exchange market?
A. It makes foreign goods cheaper, helping consumers.
B. It encourages exports, helping producers.
C. It increases the international status of other countries, which gives them an incentive to be
our trading partners.
D. There are no benefits to the United States of a high price for the dollar; a lower price is
always better.
13. What is the primary benefit to the United States of a low price for the dollar in the foreign
exchange market?
A. It makes foreign goods cheaper, helping consumers.
B. It encourages exports, helping producers.
C. It helps keep inflation under control.
D. There are no benefits to the United States of a low price for the dollar; a higher price is
always better.
14. In the early 2000s, the dollar depreciated relative to other currencies. Foreign policy makers
claimed that the U.S. government must curtail its spending and encourage its citizens to save
more. What does the U.S. saving rate have to do with the value of the dollar?
A. Nothing; those who are giving this advice do not understand economics.
B. More savings would mean more investment, and more investment would increase the value
of the dollar.
C. More domestic saving would increase the interest rate, attracting more funds to the United
States and thereby raising the value of the dollar.
D. More U.S. savings would reduce the consumption of foreign goods, reducing the trade
deficit.
15. A low exchange rate for the dollar makes foreign currencies:
A. cheaper, lowering the price of imports.
B. cheaper, raising the price of imports.
C. more expensive, lowering the price of imports.
D. more expensive, raising the price of imports.
16. When the value of the U.S. dollar fell in the mid-1990s, it:
A. encouraged U.S. imports and exports.
B. discouraged U.S. imports and exports.
C. encouraged U.S. imports and discouraged U.S. exports.
D. discouraged U.S. imports and encouraged U.S. exports.
17. An increase in a balance of trade surplus tends to:
A. exert an expansionary effect on the economy.
B. exert a contractionary effect on the economy.
C. occur when a country’s exchange rate is too high.
D. occur when a country’s exports are too expensive.
18. The United States can reduce its trade deficit by:
A. reducing the value of the dollar.
B. strengthening the dollar.
C. keeping the dollar fixed.
D. either weakening or strengthening the dollar.
19. In the 1980s Japan had a significant trade surplus. The G-7 nations wanted Japan to reduce
its trade surplus and therefore pressured the Japanese government to:
A. devalue the yen.
B. strengthen the yen.
C. keep the yen fixed.
D. control inflation.
20. A U.S. trade deficit will cause all of the following phenomena except:
A. U.S. assets will have to be sold to foreigners.
B. future interest and profits from assets sold to foreigners must be paid to them.
C. future consumption must decrease to pay for the current excess of imports over exports.
D. production must eventually increase.
21. A trade deficit allows a country to:
A. consume more than it produces.
B. produce more than it consumers.
C. produce up to the level of desired consumption.
D. consume up to the level of potential production.
22. A country with a trade surplus is:
A. consuming more than it produces.
B. producing more than it consumes.
C. producing up to the level of desired consumption.
D. consuming up to the level of potential production.
23. For most countries, international goals are generally:
A. much more important than domestic goals.
B. slightly more important than domestic goals.
C. equally important as domestic goals.
D. less important than domestic goals.
24. Which of the following statements best describes the relationship between exchange rates
and aggregate demand for U.S. output?
A. The exchange rate has no effect on aggregate demand.
B. A high exchange rate for the dollar tends to reduce aggregate demand and a low rate tends to
increase it.
C. A high exchange rate for the dollar tends to increase aggregate demand and a low rate tends
to reduce it.
D. Aggregate demand for U.S. output increases as the exchange rate increases.
25. The trade balance is:
A. exports less imports.
B. imports less exports.
C. total trade this year less total trade last year.
D. sum of imports and exports.
26. A trade surplus occurs when:
A. imports exceed exports, so that a country is consuming more than it is producing.
B. imports exceed exports, so that a country is producing more than it is consuming.
C. exports exceed imports, so that a country is producing more than it is consuming.
D. exports exceed imports, so that a country is consuming more than it is producing.
27. Which of the following is not one of the ways in which the United States finances a trade
deficit?
A. Selling U.S. assets to foreigners
B. SU.S. products to foreigners
C. Selling U.S. land and factories to foreigners
D. Selling U.S. stocks and bonds to foreigners
28. A country can have a trade deficit as long as it can:
A. purchase foreign assets.
B. make loans to other countries.
C. borrow from or sell assets to foreigners.
D. produce more than it consumes.
29. If a country’s trade deficit declines but does not go into surplus, then:
A. its consumption must be rising relative to its production.
B. it must be selling fewer assets to foreigners.
C. it must be buying more assets from foreigners.
D. it must be producing more than it is consuming.
30. If a country’s trade deficit increases, then:
A. its consumption must be falling relative to its production.
B. its consumption must be rising relative to its production.
C. it must be buying more assets from foreigners.
D. it must be selling fewer assets to foreigners.
31. A rising exchange rate raises U.S. living standards by:
A. causing a balance of trade surplus.
B. discouraging imports.
C. encouraging exports.
D. helping to hold down inflation.
32. A weaker dollar:
A. raises inflation and contracts the economy.
B. reduces inflation and contracts the economy.
C. raises inflation and expands the economy.
D. reduces inflation and expands the economy.
33. A weak dollar would pose a potential problem for Germany and Japan because it:
A. made German and Japanese goods more expensive to Americans.
B. made German and Japanese goods less expensive to Americans.
C. worsened inflation for Japan and Germany.
D. made goods imported by Germany and Japan more expensive.
34. In 2015 the euro depreciated more than 30 percent against the dollar. As a result, European:
A. exports rose, boosting the economy.
B. imports rose, boosting the economy.
C. exports declined, dragging down the economy.
D. imports declined, dragging down the economy.
35. A stronger dollar would be a good policy if the U.S. government wanted to:
A. increase U.S. exports and expand the U.S. economy.
B. increase U.S. imports and expand the U.S. economy.
C. reduce U.S. exports and slow the U.S. economy.
D. reduce U.S. imports and slow the U.S. economy.
36. A stronger dollar would be a good policy if the U.S. government wanted to:
A. reduce the trade balance and lower inflation.
B. increase the trade balance and lower inflation.
C. reduce imports and increase the trade balance.
D. increase exports and reduce the trade balance.
37. A weaker dollar would be a good policy if the U.S. government wanted to:
A. increase U.S. exports and expand the U.S. economy.
B. increase U.S. imports and expand the U.S. economy.
C. reduce U.S. exports and slow the U.S. economy.
D. reduce U.S. imports and slow the U.S. economy.
38. A weaker dollar would be a good policy if the U.S. government wanted to:
A. reduce the trade balance and lower inflation.
B. increase the trade balance and lower inflation.
C. reduce imports and increase the trade balance.
D. increase exports and reduce the trade balance.
39. Which of the following best explains a government’s motive for reducing the value of its
currency?
A. Increase the trade balance and prevent the price level from falling further
B. Increase the trade balance and prevent the price level from rising further
C. Decrease the trade balance and prevent the price level from rising further
D. Decrease the trade balance and prevent the price level from falling further
40. Over the last 30 years, the value of the dollar has:
A. increased steadily.
B. decreased steadily.
C. changed little.
D. fluctuated significantly.
41. Since 1970, the U.S. trade balance has:
A. been in surplus in almost every year.
B. been in deficit in almost every year.
C. been close to zero in almost every year.
D. fluctuated between deficit and surplus frequently.
42. The reason that domestic goals tend to dominate the political agenda is that:
A. there are no real international goals.
B. there is complete agreement on international goals but domestic goals are uncertain.
C. inflation, unemployment, and growth affect a country’s citizens more directly.
D. trade deficits and exchange rates affect a country’s citizens more directly.
43. If foreigners become unwilling to hold U.S. assets, the U.S. trade balance will:
A. go further into deficit.
B. go further into surplus.
C. experience smaller deficits.
D. experience smaller surpluses.
44. The U.S. trade deficit is most likely to be harmful in the future if:
A. U.S. citizens continue to accumulate foreign assets.
B. U.S. production continues to exceed U.S. consumption.
C. the inflow of financial capital associated with it does not finance productive investment.
D. U.S. citizens refuse to lend to foreigners as a result of it.
45. When other countries threatened to limit Japanese imports, Japan took steps to:
A. increase the value of the yen and increase its trade surplus.
B. increase the value of the yen and decrease its trade surplus.
C. decrease the value of the yen and increase its trade surplus.
D. decrease the value of the yen and decrease its trade surplus.
46. Domestic goals dominate international goals for all of the following reasons except:
A. international goals are ambiguous.
B. international goals affect a country’s population indirectly.
C. countries are becoming more economically integrated.
D. in politics, indirect effects take a back seat.
47. All of the following are international (as opposed to domestic) policy goals for the United
States except:
A. low inflation.
B. a strong dollar.
C. a balance of trade.
D. an increase in exports relative to imports.
48. The U.S. exchange rate has:
A. been fixed during the past 30 years.
B. significantly fluctuated over the past 30 years.
C. slightly fluctuated over the past 30 years.
D. appreciated over the past 5 years.
49. Some economists believe that the high U.S. trade deficit should not be a concern because:
A. the inflow of financial capital will finance new investment that will produce more goods in
the future to reverse the deficit without serious disruptions to the economy.
B. the inflow of financial capital will finance more consumption and the trade deficit will
correct itself.
C. the inflow of financial capital will finance new investment that will produce more goods in
the future but the economy will face a significant economic distress.
D. the long run effects of the trade deficit are correctly anticipated and therefore we will observe
no serious disruptions in the economy.
50. In the short run, a trade deficit allows more consumption, but in the long run, a trade deficit
is a problem because:
A. the country eventually will consume more and produce less.
B. the country eventually will sell all its financial assets to foreigners.
C. the domestic currency will appreciate.
D. the country eventually has to produce more than it consumes in order to pay foreigners their
profits.
51. International goals become primary goals when:
A. there is international pressure.
B. the domestic economy is doing well.
C. the domestic economy is in recession.
D. foreign economies aren’t doing well.
52. During 2007, the United States and Japan announced possible limits on Chinese imports
through higher tariff rates on Chinese products. To avoid these limits, China would have had to:
A. decrease the value of the yuan and increase its trade surplus.
B. decrease the value of the yuan and decrease its trade surplus.
C. increase the value of the yuan and increase its trade surplus.
D. increase the value of the yuan and decrease its trade surplus
53. In 2006 and 2007, the Chinese government slowly increased the value of the yuan from 8.1
yuan per dollar in January 2006 to 7.69 yuan per dollar in May 2007. The Chinese government’s
objective in increasing the value of its currency was:
A. to increase the trade surplus and prevent the price level from falling further.
B. to increase the trade surplus and prevent the price level from rising further.
C. to decrease the trade surplus and prevent the price level from rising further.
D. to decrease the trade surplus and prevent the price level from falling further.
54. Albania wants to maintain an exchange rate of $0.20 per lek. However, the market for lek
per U.S. dollar has determined an exchange rate of $0.14 per lek (depreciation of the lek against
the U.S. dollar). The Croatian central bank decides to increase the domestic interest rates through
a contractionary monetary policy. This would shift the:
A. supply of lek to the left and cause the lek to lose value.
B. supply of lek to the right and cause the lek to lose value.
C. demand of lek to the right and cause the lek to gain value.
D. demand of lek to the left and cause the lek to lose value.
55. As domestic income decreases, the trade balance:
A. is likely to improve.
B. is likely to worsen.
C. is not likely to change
D. may improve or worsen depending on the size of the decrease in income.
56. Considering only its direct effect on income, expansionary monetary policy tends to:
A. increase income and imports, shifting the U.S. trade balance in the direction of deficit.
B. increase income and imports, shifting the U.S. trade balance in the direction of surplus.
C. decrease income and imports, shifting the U.S. trade balance in the direction of deficit.
D. decrease income and imports, shifting the U.S. trade balance in the direction of surplus.
57. Considering only its direct effect on income, contractionary monetary policy tends to:
A. increase income and imports, shifting the U.S. trade balance in the direction of deficit.
B. increase income and imports, shifting the U.S. trade balance in the direction of surplus.
C. decrease income and imports, shifting the U.S. trade balance in the direction of deficit.
D. decrease income and imports, shifting the U.S. trade balance in the direction of surplus.