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chapter 15
Indicate whether the statement is true or false.
1. The Group-of-Five (G-5) nations include Japan, Germany, China, and Australia.
a. True
b. False
2. A nation realizes overall balance when it achieves full employment and current account equilibrium.
a. True
b. False
3. Expenditure-changing policies modify the direction of aggregate demand, shifting it between domestic output and
imports.
a. True
b. False
4. Currency devaluation and revaluation are considered to be expenditure-changing policies since they alter a country's
aggregate demand for goods and services.
a. True
b. False
5. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary
policy is implemented to combat recession. The initial and secondary effects of the policy have conflicting effects on
aggregate demand, thus weakening the policy's expansionary effect.
a. True
b. False
6. Given an open economy with high capital mobility, monetary policy is strengthened under fixed exchange rates.
a. True
b. False
7. Expenditure-switching policies include fiscal policy and monetary policy.
a. True
b. False
8. International policy coordination is plagued by differing national economic objectives, institutions, political climates,
and phases in the business cycle.
a. True
b. False
9. The goals of the Plaza Agreement of 1985 were to combat protectionism in the U.S. Congress, to promote world
economic expansion by stimulating demand in Germany and Japan, and to ease the burden of the U.S. debt service.
a. True
b. False
10. Nations have typically placed greater importance to the goal of internal balance than to the goal of external balance.
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a. True
b. False
11. Given an open economy with high capital mobility and fixed exchange rates, suppose an expansionary fiscal policy is
implemented to combat recession. The initial and secondary effects of the policy cause aggregate demand to increase, thus
strengthening the policy's expansionary effect.
a. True
b. False
12. Expenditure-switching policies alter the level of total spending (aggregate demand) for goods and services produced
domestically and those imported.
a. True
b. False
13. Currency devaluation and revaluation primarily affect the economy's current account and have secondary effects on
domestic employment and inflation.
a. True
b. False
14. The Bonn Summit of 1978 and Plaza Accord of 1985 are examples of international policy coordination.
a. True
b. False
15. Exchange rate management policies require international policy coordination because a depreciation of one nation's
currency implies an appreciation of its trading partner's currency.
a. True
b. False
16. A nation realizes external balance when its current account is in equilibrium, i.e. neither a trade balance nor a trade
deficit.
a. True
b. False
17. Given an open economy with high capital mobility, fiscal policy is strengthened under fixed exchange rates.
a. True
b. False
18. Economic policymakers have typically adopted expenditure-increasing policies to combat inflation and expenditure-
reducing policies to combat recession.
a. True
b. False
19. Fiscal and monetary policies are generally used to combat domestic recession and inflation and have secondary effects
on the balance of payments.
a. True
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b. False
20. Expenditure-switching policies include currency revaluation, currency devaluation, and direct controls such as tariffs,
quotas, and subsidies.
a. True
b. False
21. When the economy is in deep recession or depression, it is operating on that portion of its aggregate supply curve that
is horizontal.
a. True
b. False
22. Changes in a country's net exports, investment spending, or government spending will cause its aggregate demand
curve to shift.
a. True
b. False
23. Under floating exchange rates and high capital mobility, an expansionary monetary policy would help a country
resolve a recession and a current account deficit.
a. True
b. False
24. A nation realizes internal balance if the economy achieves full employment and price stability.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
25. The Plaza Agreement of 1985 and Louvre Accord of 1987 are examples of
a. tariff trade barrier formation.
b. nontariff trade barrier formation.
c. international economic policy coordination.
d. beggar-thy-neighbor policies.
26. Which of the following is an example of an expenditure-increasing policy?
a. an increase in import tariffs
b. a decrease in import quotas
c. higher income taxes
d. an increase in the money supply
27. The appropriate expenditure-switching policy to correct a trade deficit is
a. contractionary monetary policy.
b. expansionary fiscal policy.
c. currency devaluation.
d. currency revaluation.
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28. Which of the following situations are likely to require direct controls to achieve overall balance?
a. when an economy is experiencing inflation with unemployment
b. when an economy is experiencing inflation with a trade deficit
c. when an economy is experiencing inflation with a trade surplus
d. when an economy is experiencing inflation with a budget deficit
29. The appropriate expenditure-switching policy to correct a trade surplus is
a. currency revaluation.
b. currency devaluation.
c. expansionary monetary policy.
d. contractionary fiscal policy.
30. Given a system of floating exchange rates, other things equal an expansionary fiscal policy by the United States will
cause
a. the dollar to appreciate and will decrease U.S. net exports.
b. the dollar to appreciate and will increase U.S. net exports.
c. the dollar to depreciate and will increase U.S. net exports.
d. the dollar to depreciate and will decrease U.S. net exports.
31. Given an open economy with high capital mobility, which of the following statements is NOT true?
a. Fiscal policy is strengthened under fixed exchange rates.
b. Monetary policy is weakened under fixed exchange rates.
c. Monetary policy is strengthened under floating exchange rates.
d. Fiscal policy is strengthened under floating exchange rates.
32. Which of the following is an example of an expenditure-reducing policy?
a. a devaluation of the par value of a currency
b. a decrease in government spending
c. a decrease in import duties
d. a decrease in business taxes
33. Historically, most nations generally considered _________ as the most important economic goal.
a. external balance
b. internal balance
c. overall balance
d. exchange rate stability
34. Given fixed exchange rates, assume Mexico initiates expansionary monetary and fiscal policies to combat recession.
Other things equal, these policies will also
a. increase both imports and exports.
b. increase exports and reduce imports.
c. reduce a balance-of-payments surplus.
d. reduce a balance-of-payments deficit.
35. With a fixed exchange rate system and high capital mobility, internal balance is most effectively achieved by using
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a. expansionary monetary policy to combat recession.
b. expansionary fiscal policy to combat recession.
c. contractionary monetary policy to combat recession.
d. contractionary fiscal policy to combat recession.
36. A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession?
a. expansionary fiscal policy
b. expansionary monetary policy
c. contractionary fiscal policy
d. contractionary monetary policy
Exhibit 15.1
At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e.,
depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information.
37. Refer to Exhibit 15.1. The Federal Reserve might refuse to support the accord on the grounds that when helping to
drive the dollar's exchange value downward, the required policy may also cause
a. higher inflation in the U.S.
b. a larger budget deficit in the U.S.
c. higher unemployment in the U.S.
d. slower economic growth in the U.S.
38. A system of fixed exchange rates and high capital mobility strengthens which policy in combating a recession?
a. expansionary fiscal policy
b. expansionary monetary policy
c. contractionary fiscal policy
d. contractionary monetary policy
39. Given a system of floating exchange rates and high capital mobility, other things equal an expansionary monetary
policy by the Federal Reserve will cause
a. the dollar to appreciate and will decrease U.S. net exports.
b. the dollar to appreciate and will increase U.S. net exports.
c. the dollar to depreciate and will increase U.S. net exports.
d. the dollar to depreciate and will decrease U.S. net exports.
40. Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and
selling its currency for foreign currency. Other things equal this also causes the
a. domestic money supply to decrease and a decline in aggregate demand.
b. domestic money supply to increase and a decline in aggregate demand.
c. domestic money supply to decrease and a rise in aggregate demand.
d. domestic money supply to increase and a rise in aggregate demand.
41. A nation experiences overall balance if it achieves
a. neither deficits nor surpluses in its current account, full employment, and price stability.
b. a trade surplus, full employment, and price stability.
c. full employment, price stability, and no change in its money supply.
d. full employment, price stability, and maximum productivity.
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42. Under a fixed exchange-rate system and high capital mobility, other things equal an expansionary fiscal policy leads
to a
a. trade deficit and capital inflow.
b. trade deficit and capital outflow.
c. trade surplus and capital inflow.
d. trade surplus and capital outflow.
43. At the ________, the Group-of-Five nations agreed to intervene in the currency markets to promote a depreciation in
the U.S. dollar's exchange value.
a. Plaza Agreement of 1985
b. Louvre Accord of 1987
c. Bonn Summit of 1978
d. Tokyo Summit of 1962
44. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and
buying its currency with foreign currency. Other things equal, this also causes the
a. domestic money supply to decrease and a decline in aggregate demand.
b. domestic money supply to increase and a decline in aggregate demand.
c. domestic money supply to decrease and a rise in aggregate demand.
d. domestic money supply to increase and a rise in aggregate demand.
45. Under a fixed exchange-rate system and high capital mobility, other things equal an expansion in the domestic money
supply leads to a
a. trade deficit and capital inflow.
b. trade deficit and capital outflow.
c. trade surplus and capital inflow.
d. trade surplus and capital outflow.
46. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary fiscal policy
is implemented to combat recession. Other things equal, the initial and secondary effects of the policy
a. cause aggregate demand to increase, thus strengthening the policy's expansionary effect on real output.
b. cause aggregate demand to decrease, thus eliminating the policy's expansionary effect on real output.
c. have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real output.
d. have conflicting effects on aggregate demand, thus strengthening the policy's expansionary effect on real output.
47. A nation experiences external balance if it achieves
a. no net changes in its international gold stocks.
b. productivity levels equal to those of its trading partners.
c. a trade surplus.
d. neither deficits nor surpluses in its current account.
48. Suppose Brazil has a floating exchange rate, and it faces domestic inflation and a trade deficit. Assuming it desires
overall balance, if Brazil shrinks its money supply, other things equal one would expect which of the following to occur?
a. inflation to become more severe and the trade deficit to become less severe, an example of policy agreement
b. inflation to become more severe and the trade deficit to become more severe, an example of policy conflict
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c. inflation to become less severe and the trade deficit to become less severe, an example of policy agreement
d. inflation to become less severe and the trade deficit to become more severe, an example of policy conflict
49. Suppose that Kenya uses a floating exchange rate and experiences high capital mobility. Assume that Kenya is
experiencing a recession and high inflation. In order to achieve overall balance, other things equal, Kenya will likely need
to implement
a. contractionary fiscal policy.
b. wage and price controls.
c. expansionary fiscal policy.
d. contractionary monetary policy.
50. Given fixed exchange rates, assume Mexico initiates contractionary monetary and fiscal policies to combat inflation.
Other things equal, these policies will also
a. reduce a balance-of-payments surplus.
b. reduce a balance-of-payments deficit.
c. increase both imports and exports.
d. decrease both imports and exports.
51. Given an open economy with high capital mobility, under a system of managed-floating exchange rates with heavy
exchange rate intervention
a. fiscal policy is more successful in promoting internal balance, while monetary policy is less successful.
b. monetary policy is more successful in promoting internal balance, while fiscal policy is less successful.
c. both fiscal policy and monetary policy are equally successful in promoting internal balance.
d. neither fiscal policy nor monetary policy are successful in promoting internal balance.
52. A nation experiences internal balance if it achieves
a. full employment.
b. price stability.
c. full employment and price stability.
d. unemployment and price instability.
53. In a closed economy, which of the following will cause the economy's aggregate demand curve to shift to the right?
a. decreases in wages and salaries paid to employees
b. increases in the prices of oil and natural gas
c. decreases in income taxes for households
d. decreases in the productivity of labor
54. Assume a system of floating exchange rates and high capital mobility. In response to relatively high domestic interest
rates, suppose that foreign investors place their funds in domestic capital markets. The result would be
a. a depreciation of the domestic currency and a rise in net exports.
b. a depreciation of the domestic currency and a fall in net exports.
c. an appreciation of the domestic currency and a rise in net exports.
d. an appreciation of the domestic currency and a fall in net exports.
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55. Suppose the United States has a fixed exchange rate, and it faces domestic recession and a trade deficit. Assuming it
desires overall balance, if the United States devalues the dollar, other things equal one would expect which of the
following to occur?
a. the recession to become less severe and the trade deficit to become less severe
b. the recession to become more severe and the trade deficit to become less severe
c. the recession to become less severe and the trade deficit to become more severe
d. the recession to become more severe and the trade deficit to become more severe
56. Which of the following explains why the aggregate supply curve is generally upward sloping?
a. When real output decreases, per-unit production costs tend to increase.
b. When aggregate demand shifts rightward, aggregate supply also always shifts rightward as well.
c. When real output increases, per-unit production costs decrease.
d. When real output increases, per-unit production costs increase as well.
57. Suppose the United States has a fixed exchange rate, and it faces domestic inflation and a trade surplus. Assuming it
desires overall balance, if the United States revalues the dollar, other things equal one would expect which of the
following to occur?
a. inflation to become more severe and the trade surplus to become less severe
b. inflation to become less severe and the trade surplus to become less severe
c. inflation to become less severe and the trade surplus to become more severe
d. inflation to become more severe and the trade surplus to become more severe
Exhibit 15.1
At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e.,
depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information.
58. Refer to Exhibit 15.1. Other things equal, to help drive the dollar's exchange value downward, the Federal Reserve
would
a. reduce taxes.
b. increase taxes.
c. decrease the money supply.
d. increase the money supply.
59. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and
buying its currency with foreign currency. Other things equal this causes the
a. domestic money supply to decrease and a decline in aggregate demand.
b. domestic money supply to increase and a decline in aggregate demand.
c. domestic money supply to decrease and a rise in aggregate demand.
d. domestic money supply to increase and a rise in aggregate demand.
60. All of the following are obstacles to international economic policy coordination except
a. different national objectives and institutions.
b. different national political climates.
c. different phases in the business cycle.
d. different national currencies.
61. Which policy is an example of an expenditure-switching policy?
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a. an increase in the money supply
b. a decrease in government spending
c. an increase in business taxes
d. a decrease in import tariffs
62. Suppose Brazil has a fixed exchange rate, and it faces domestic recession and a trade surplus. Assuming it desires
overall balance, if Brazil revalues its currency, other things equal one would expect which of the following to occur?
a. the recession to become less severe and the trade surplus to become less severe
b. the recession to become more severe and the trade surplus to become more severe
c. the recession to become more severe and the trade surplus to become less severe
d. the recession to become less severe and the trade surplus to become more severe
63. A problem that economic policy makers confront when attempting to promote both internal and external balance for
the nation is that monetary or fiscal policies aimed at the domestic sector also have impacts on
a. trade flows.
b. capital flows.
c. both trade flows and capital flows.
d. None of these are correct.
64. Assume a system of floating exchange rates and high capital mobility. In response to relatively high interest rates
abroad, suppose domestic investors place their funds in foreign capital markets. Other things equal, the result would be
a. a depreciation of the domestic currency and a rise in net exports.
b. a depreciation of the domestic currency and a fall in net exports.
c. an appreciation of the domestic currency and a rise in net exports.
d. an appreciation of the domestic currency and a fall in net exports.
65. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary
policy is implemented to combat recession. Other things equal, the initial and secondary effects of the policy
a. cause aggregate demand to increase, thus strengthening the policy's expansionary effect on real output.
b. cause aggregate demand to decrease, thus eliminating the policy's expansionary effect on real output.
c. have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real output.
d. have conflicting effects on aggregate demand, thus strengthening the policy's expansionary effect on real output.
66. Which of these policies are expenditure-changing policies?
a. currency devaluation and revaluation
b. import quotas and tariffs
c. monetary and fiscal policy
d. wage and price controls
67. Suppose that Brunei has a floating exchange rate and experiences high capital mobility. Assume that Brunei is
suffering from a recession and it also has a trade deficit. Other things equal, which of the following policy options is likely
to achieve overall balance for Brunei?
a. expansionary monetary policy
b. contractionary monetary policy
c. expansionary fiscal policy
d. contractionary fiscal policy
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68. What happens to the balance of payments under a fixed exchange rate system, when expansionary or contractionary
monetary policy is used?
69. What policy instrument should be used when demand-pull inflation exists?
70. Was the Plaza Agreement of 1985 a success?
71. What is international economic policy coordination?
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Answer Key
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