20) Explain how exchange rate policies affected economies during the Great Depression.
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.
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) Which of the following correctly shows the relationship between savings, the government
budget balance, and the current account?
A) S + CA = I + (T – G)
B) S + CA = I + (T + G)
C) S + (T – G) = I + CA
D) S + (T + G) = I + CA
4) Which of the following correctly describes the relationship between savings, the government
budget balance, and the current account?
A) Private savings plus the government budget balance must equal private investment plus the
current account.
B) Private savings plus the current account must equal private investment plus the government
budget surplus or deficit.
C) Private savings plus private investment must equal the current account plus the government
budget balance.
D) Private investment must equal private savings plus the current account minus the government
budget balance.
5) If the government has a $100 million budget deficit, private saving is equal to $500 million,
private investment is equal to $300 million, what is the value of the current account in
equilibrium?
A) $100 million surplus
B) $700 million surplus
C) $100 million deficit
D) $700 million deficit
6) Contractionary fiscal policy can lead to a depreciation of the nation’s currency.
7) Expansionary fiscal policy is likely to lead a nation’s currency to depreciate.
8) Expansionary monetary policy is likely to lead to a depreciation of the nation’s currency.
9) An increase in interest rates causes that nation to experience an outflow of financial capital
and causes its currency to depreciate.
10) Fiscal policy does not have an effect on interest rates.
11) A depreciation of the currency can switch spending away from foreign goods and reduce the
effect of rising incomes on the current account.
12) Monetary policy is more effective in an open economy than in a closed economy.
13) If interest rates rise, what will happen to the nation’s exchange rate?
14) How does expansionary monetary policy affect a nation’s exchange rate?
15) Describe the policies a nation would follow to correct a current account deficit. What are the
primary purposes of each type of policy?
16) Describe the difficult choices in macroeconomic policy that Argentina faced in the late
1990s.
17) Explain why in an economy with fixed exchange rates, monetary policy will not cause
expenditure switching.
18) Carefully explain why monetary policy is likely to be more effective in a open economy than
fiscal policy.
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.
2) The J-curve effect that results from 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.
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.
4) Expenditure-reducing policies designed to improve a current account deficit
A) turn domestic spending towards domestic goods.
B) reduce the overall level of demand in the economy.
C) turn domestic spending towards foreign goods.
D) increase the overall level of demand in the economy.
5) Expenditure-switching policies designed to improve a current account deficit
A) turn domestic spending towards domestic goods.
B) reduce the overall level of demand in the economy.
C) turn domestic spending towards foreign goods.
D) increase the overall level of demand in the economy.
6) Used alone, an expenditure-reducing policy that lowers aggregate demand
A) will not reduce the current account deficit.
B) is likely to cause a recession.
C) will be likely to increase the current account deficit.
D) is likely to increase domestic inflation.
7) Used alone, an expenditure-switching policy that turns spending from foreign goods to
domestic goods
A) will not reduce the current account deficit.
B) is likely to cause a recession.
C) will be likely to increase the current account deficit.
D) is likely to increase domestic inflation.
8) The J-curve shows that, after a currency depreciation,
A) the current account is likely to worsen before it improves.
B) the current account is likely to improve before it worsens.
C) the current account will remain unchanged after all adjustments have taken place.
D) the current account is difficult to change in the long run.
9) A common response to stop a depreciation of a currency is to use contractionary monetary
policy, which could lead to a recession.
10) It is more certain how expansionary monetary policy will affect the current account than how
expansionary fiscal policy will affect it.
11) Expenditure switching policies are best used on their own.
12) If a currency rapidly depreciates, what are the possible negative results to the economy of
using contractionary monetary policy to address the depreciation?
13) How is an exchange rate depreciation likely to affect imports and exports in the short run and
over a longer period of time?
14) Use a J-curve to illustrate the effect on the current account of an exchange rate depreciation.
Explain why the curve has the shape that it does.
15) Explain why expenditure switching and expenditure reducing policies need to be used
together.
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
2) Which of the following is NOT a likely goal of macroeconomic coordination between
nations?
A) Reducing trade barriers
B) Achieving a desirable level of world economic growth
C) Avoiding a global economic crisis
D) Correcting global economic imbalances
3) When macroeconomic policies are not coordinated,
A) macroeconomic policies will not be effective.
B) expansionary policies in one country are likely to increase global imbalances.
C) worldwide recessions are likely.
D) low-income countries cannot grow.
4) During the worldwide recession of 2007-2009,
A) the Fed and the European Central Bank worked together.
B) all countries coordinated macroeconomic policies.
C) nations sacrificed some sovereignty.
D) the IMF coordinated world economic policies.
5) Coordination of macroeconomic policies between nation is uncommon.
6) Which nations make up the G8?
7) Explain why macroeconomic policies that are coordinated can enhance economic growth, but
why policies that are not coordinated can increase global imbalances.