[QUESTION]
59. Issuing money to finance budget deficits:
A. increases the resources consumed by both the government and the private sector.
B. increases the resources consumed by the government but does not change the resources
consumed by the private sector.
C. increases the resources consumed by the government and thereby leaves fewer resources for
the private sector.
D. does not increase the resources consumed by either the government or the private sector.
60. The more rapidly the government creates money to finance its budget deficits, the:
A. greater the inflation tax and the greater the reduction in the real value of any assets specified
in nominal terms.
B. greater the inflation tax and the smaller the reduction in the real value of any assets specified
in nominal terms.
C. smaller the inflation tax and the greater the reduction in the real value of any assets specified
in nominal terms.
D. smaller the inflation tax and the smaller the reduction in the real value of any assets specified
in nominal terms.
61. The expectation of greater inflation resulting from the government’s creation of money to
finance budget deficits often results in a:
A. higher nominal demand for goods.
B. lower money velocity.
C. less inflationary pressure.
D. less rapid money growth.
62. An effect of the inflation tax is that it redistributes income from the:
A. borrowers of fixed-interest-rate debt to the government.
B. borrowers of fixed-interest-rate debt to the lenders of this debt.
C. lenders of fixed-interest-rate debt to the borrowers of this debt.
D. government to the borrowers of fixed-interest-rate debt.
63. Proponents of using the inflation tax to finance government budget deficits argue that:
A. these deficits would be far worse otherwise.
B. inflation is ultimately beneficial in the long run.
C. while inflation is undesirable, the breakdown of the economy that would occur in the absence
of an inflation tax would be worse.
D. the economic slowdown produced by the inflation tax is preferable to the hyperinflation that
would occur in the absence of the inflation tax.
64. Opponents of using the inflation tax to finance government budget deficits argue that:
A. the government can raise taxes to eliminate any budget deficit.
B. inflation is ultimately beneficial in the long run.
C. the inflation tax is a temporary solution that requires ever higher levels of inflation to remain
effective.
D. the economic slowdown produced by the inflation tax is more damaging than the
hyperinflation that would occur in the absence of the inflation tax.
65. Developing countries employ the inflation tax because it provides a:
A. long-run solution to their budget problems even if it is politically unpopular.
B. short-run solution that helps keep the government afloat, even if only temporarily.
C. a solution to their inflation problem.
D. long-run solution to both their economic and political problems.
66. In the early 2000s in Ecuador, the central bank financed the government deficit and created
high inflation. The high level of inflation and its relationship to the government deficit are an
example of:
A. an inflation tax.
B. the underground economy.
C. disinflation.
D. the central bank dependency.
67. In the early 2000s, Ecuador replaced its currency, the sucre, with the U.S. dollar as its
official currency to solve its inflation problem. As long as Ecuador maintains the U.S. dollar as
its official currency, what will happen to the monetary policy of Ecuador?
A. it will become both more powerful and more flexible
B. it will become more powerful but less flexible
C. it will become less powerful but more flexible
D. it effectively will cease to exist
68. In the early 2000s, Ecuador replaced its currency, the sucre, with the U.S. dollar as its
official currency. What would prompt a country to abandon its own currency and adopt the
currency of the United States?
A. With dollars, monetary policy will be better able to offset shock to the economy.
B. Adopting the dollar will bring inflation under control, which will aid economic growth.
C. In making the transition to dollars, corrupt government officials are able to amass tremendous
fortunes.
D. Adopting the dollar will result in the elimination of U.S. tariffs on exports from Ecuador to
the United States.
69. In the early 2000s, Ecuador replaced its currency, the sucre, with the U.S. dollar as its
official currency. What will no longer be possible for the government of Ecuador?
A. financing government deficits by printing money
B. financing government deficits by borrowing in the financial markets
C. running a balance of payments deficit on the current account
D. running a balance of payments deficit on the capital account
70. When Zimbabwe needed to finance the war against Congo, the government issued bonds
and forced the Central Bank to buy those bonds in exchange of new printed Zimbabwean dollars.
This action prompted a hyperinflation of almost 100,000 percent. This is an example of a lack of:
A. a central bank independency.
B. a central bank dependency.
C. a central bank effectiveness in its monetary policy.
D. central bank economists running the institution.
71. On January 1, 2001, El Salvador “dollarized” its economy. The U.S. dollar circulated
throughout the country along with the Salvadoran colon for the first year. By the end of 2002 the
official currency circulating in this economy was the U.S. dollar. El Salvador abandoned its own
currency and adopted the currency of the United States because:
A. with dollars, monetary policy would be more effective at offsetting demand shocks in the
economy.
B. the government would no longer be able to finance deficits by printing money, and inflation
would be under control.
C. the government would still be able to finance deficits by printing U.S. dollars, and inflation
would be under control.
D. the government would still be able to run deficits by printing money.
72. A monetized debt prompts:
A. a contractionary fiscal policy.
B. an inflationary tax.
C. a contractionary monetary policy.
D. an expansionary tax base.
73. In the 1980s and 1990s, Chile adopted capital controls that limited the ability of its citizens
to buy or sell assets abroad. This action:
A. introduced full convertibility.
B. limited only current account convertibility.
C. limited only capital account convertibility.
D. limited both current and capital account convertibility.
74. The IMF often requires countries that borrowed from it to introduce policies that privatize
government-owned industries such as telecommunications and power generation. This is an
example of:
A. a balance of payments constraint.
B. conditionality.
C. limited capital account convertibility.
D. infrastructure investment.
75. In the early 2000s there was a strong black market for Chinese yuan. It is widely held that
the Chinese yuan is undervalued. Based on this information, we know that China:
A. has flexible exchange rates.
B. has partially flexible exchange rates.
C. has fixed but convertible exchange rates.
D. does not allow complete convertibility of its currency.
76. With full exchange rate convertibility individuals can:
A. not exchange their currency for the currency of any other country.
B. exchange their currency for the currency of any other country, but only to purchase goods
produced in other countries.
C. exchange their currency for the currency of any other country, but only to purchase assets
from other countries.
D. exchange their currency for the currency of any other country for any purpose they choose.
77. Developing economies:
A. generally allow their citizens to buy and sell foreign currency freely.
B. are generally committed to full exchange rate convertibility.
C. generally oppose full exchange rate convertibility but are required by the IMF to implement it
anyway.
D. generally do not have fully convertible currencies.
78. In comparison to most developed economies, developing countries:
A. offer greater currency convertibility.
B. offer about the same degree of currency convertibility.
C. offer more restricted currency convertibility.
D. sometimes offer higher levels of currency convertibility and sometimes offer lower levels.
79. Almost no developing country offers full convertibility because they want to:
A. increase foreign saving to depreciate their currency.
B. limit investment by foreign multinationals.
C. avoid an outflow of domestic saving.
D. encourage domestic residents to save abroad.
80. If a developing country wants to limit the ability of its citizens to purchase foreign assets but
does not want to restrict other international transactions, it would offer:
A. full convertibility.
B. convertibility on the current account.
C. convertibility on the capital account.
D. not allow convertibility of domestic currency into foreign currency.
81. If a currency is convertible on the current account, which of the following transactions
would not be permissible?
A. the purchase of foreign currency in order to import goods or services
B. the sale of foreign currency resulting from the export of goods or services
C. the purchase of foreign currency in order to purchase assets abroad
D. the sale of foreign currency resulting from the sale of assets abroad
82. Limited capital account convertibility provides:
A. a greater level of convertibility than full convertibility.
B. a greater level of convertibility than convertibility on the current account.
C. a lower level of convertibility than convertibility on the current account.
D. the lowest possible level of convertibility.
83. The purpose of limited capital account convertibility is to:
A. eliminate trade in goods and services.
B. limit trade in certain types of goods and services.
C. eliminate trade in assets.
D. limit trade in certain types of assets.
84. If a developing country makes its currency fully convertible, it runs the risk of having too:
A. low levels of domestic saving and investment.
B. high levels of domestic saving and investment.
C. much domestic saving and not enough domestic investment.
D. little foreign investment.
85. In a dual economy with limited currency convertibility:
A. both the traditional and international sectors tend to be dollarized.
B. only the traditional sector tends to be dollarized.
C. only the international sector tends to be dollarized.
D. neither the traditional nor the international sector tends to be dollarized.
86. If a developing country has sufficient reserves, the buying and selling of foreign currency by
the central bank is:
A. likely to have roughly the same impact on the exchange rate as in developed countries.
B. likely to have a much greater impact on the exchange rate than in developed countries.
C. likely to have a much smaller impact on the exchange rate than in developed countries.
D. completely ineffective on the exchange rate.
87. The purpose of the IMF is to:
A. provide developing countries with short-term loans and technical assistance.
B. buy and sell the currencies of developing countries in order to stabilize their value.
C. determine exchange rates for developing countries.
D. determine monetary and fiscal policy in developing countries.
88. In general, the IMF provides developing countries with:
A. loans and lets these countries decide how the loans will be used.
B. loans but only if the government adopts certain policies specified by the IMF in return.
C. technical advice but does not provide them with loans.
D. neither loans nor technical advice.
89. When the IMF provides loans to developing countries, it often requires these countries to
adopt:
A. contractionary monetary and fiscal policies.
B. a contractionary monetary policy and an expansionary fiscal policy.
C. a contractionary fiscal policy and an expansionary monetary policy.
D. expansionary monetary and fiscal policies.
90. The IMF policies that accompany most IMF loans are typically:
A. contractionary in the short run.
B. expansionary in the short run.
C. contractionary in the long run.
D. procyclical in the long run.
91. Many developing countries face a balance of payments constraint because:
A. they hold too many international reserves.
B. they hold too few international reserves.
C. the IMF forces them to adopt policies that are counterproductive.
D. they fail to implement exchange rate policy correctly.
92. The balance of payments constraint refers to the limits on:
A. domestic macroeconomic policy arising from a shortage of international reserves.
B. currency convertibility observed in most developing countries.