CHAPTER 16—MACROECONOMIC POLICY IN AN OPEN ECONOMY
MULTIPLE CHOICE
1. 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
2. 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.
An increase in its money supply equal to increases overseas
d.
Equilibrium in its balance of payments
3. A nation experiences overall balance if it achieves:
a.
Balance-of-payments equilibrium, full employment, and price stability
b.
Balance-of-payments equilibrium, maximum productivity, and price stability
c.
Full employment, price stability and no change in its money supply
d.
Full employment, price stability, and maximum productivity
4. Most industrial countries generally considered ____ as the most important economic goal.
a.
External balance
b.
Internal balance
c.
Maximum efficiency for business
d.
Maximum efficiency for labor
5. Which 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
6. Which policy is an expenditure-switching policy?
a.
Increase in the money supply
b.
Decrease in government expenditures
c.
Increase in business and household taxes
d.
Decrease in import tariffs
7. An expenditure-increasing policy would consist of an increase in:
a.
Import tariffs
b.
Import quotas
c.
Governmental taxes
d.
The money supply
8. An expenditure-reducing policy would consist of a decrease in:
a.
The par value of a currency
b.
Government expenditures
c.
Import duties
d.
Business or household taxes
9. Given fixed exchange rates, assume Mexico initiates expansionary monetary and fiscal policies to
combat recession. 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
10. Given fixed exchange rates, assume Mexico initiates contractionary monetary and fiscal policies to
combat inflation. These policies will also:
a.
Reduce a balance-of-payments surplus
b.
Reduce a balance-of-payments deficit
c.
Increases both imports and exports
d.
Decrease both imports and exports
11. The appropriate expenditure-switching policy to correct a current account surplus is:
a.
Currency revaluation
b.
Currency devaluation
c.
Expansionary monetary policy
d.
Contractionary fiscal policy
12. The appropriate expenditure-switching policy to correct a current account deficit is:
a.
Contractionary monetary policy
b.
Expansionary fiscal policy
c.
Currency devaluation
d.
Currency revaluation
13. Suppose the United States faces domestic recession and a current account deficit. Should the United
States devalue the dollar, one would expect the:
a.
Recession to become less severe—deficit to become less severe
b.
Recession to become more severe—deficit to become less severe
c.
Recession to become less severe—deficit to become more severe
d.
Recession to become more severe—deficit to become more severe
14. Suppose the United States faces domestic inflation and a current account surplus. Should the United
States revalue the dollar, one would expect the:
a.
Inflation to become more severe—surplus to become less severe
b.
Inflation to become less severe—surplus to become less severe
c.
Inflation to become less severe—surplus to become more severe
d.
Inflation to become more severe—surplus to become more severe
15. Suppose Brazil faces domestic recession and a current account surplus. Should Brazil revalue its
currency, one would expect the:
a.
Recession to become less severe—surplus to become less severe
b.
Recession to become more severe—surplus to become more severe
c.
Recession to become more severe—surplus to become less severe
d.
Recession to become less severe—surplus to become more severe
16. Suppose that Brazil faces domestic inflation and a current account deficit. Should Brazil devalue its
currency, one would expect the:
a.
Inflation to become more severe—deficit to become less severe
b.
Inflation to become more severe—deficit to become more severe
c.
Inflation to become less severe—deficit to become less severe
d.
Inflation to become less severe—deficit to become more severe
17. In a closed economy, which of the following will cause the economy’s aggregate demand curve to shift
to the right?
a.
decreases and 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
18. 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
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
19. 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 only
b.
Capital flows only
c.
both trade flows and capital flows
d.
Neither trade flows nor capital flows
20. Given an open economy with high capital mobility and floating exchange rates, suppose an
expansionary fiscal policy is implemented to combat recession. 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
21. 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
22. 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
23. Given an open economy with high capital mobility, all of the following statements are true except:
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
24. Under a system of managed-floating exchange rates with heavy exchange rate intervention:
a.
Fiscal policy is successful in promoting internal balance, while monetary policy is
unsuccessful
b.
Monetary policy is successful in promoting internal balance, while fiscal policy is
unsuccessful
c.
Both fiscal policy and monetary policy are successful in promoting internal balance
d.
Neither fiscal policy nor monetary policy are successful in promoting internal balance
25. Given a system of floating exchange rates, 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
26. Given a system of floating exchange rates, a contractionary 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
27. 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
28. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange
market and buying its currency with foreign currency. 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
29. 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
30. 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
Exhibit 16.1
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.
31. Refer to Exhibit 16.1. 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
32. Refer to Exhibit 16.1. The Federal Reserve might refuse to support the accord on the grounds that
when helping to drive the dollar’s exchange value downward, it promotes an increase in the U.S.:
a.
Rate of inflation
b.
Budget deficit
c.
Unemployment level
d.
Economic growth rate
33. Under a fixed exchange-rate system and high capital mobility, an expansion in the domestic money
supply leads to:
a.
Trade-account deficit and a capital-account surplus
b.
Trade-account deficit and a capital-account deficit
c.
Trade-account surplus and a capital-account surplus
d.
Trade-account surplus and a capital-account deficit
34. Under a fixed exchange-rate system and high capital mobility, a contraction in the domestic money
supply leads to a:
a.
Trade-account deficit and a capital-account surplus
b.
Trade-account deficit and a capital-account deficit
c.
Trade-account surplus and a capital-account surplus
d.
Trade-account surplus and a capital-account deficit
35. Under a fixed exchange-rate system and high capital mobility, an expansionary fiscal policy leads to a:
a.
Trade-account deficit and a capital-account surplus
b.
Trade-account deficit and a capital-account deficit
c.
Trade-account surplus and a capital-account surplus
d.
Trade-account surplus and a capital-account deficit
36. Under a fixed exchange-rate system and high capital mobility, a contractionary fiscal policy leads to a:
a.
Trade-account deficit and a capital-account surplus
b.
Trade-account deficit and a capital-account deficit
c.
Trade-account surplus and a capital-account surplus
d.
Trade-account surplus and a capital-account deficit
37. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange
market and buying its currency with foreign currency. 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 fall in aggregate demand
38. Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange
market and selling its currency for foreign currency. 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 fall in aggregate demand
39. Assume a system of floating exchange rates. In response to relatively high interest rates abroad,
suppose domestic investors place their funds in foreign 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
40. Assume a system of floating exchange rates. 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
41. When a nation realizes external balance
a.
it can have a current account deficit
b.
it can have a current account surplus
c.
it has neither a current account deficit nor a current account surplus
d.
Both a and b
42. Direct controls may take the form of
a.
Tariffs
b.
Export subsidies
c.
Export quotas
d.
All of the above
43. With a fixed exchange rate system, internal balance is most effectively achieved by using
a.
Expansionary monetary policy to combat recession
b.
Expansionary fiscal policy to combat inflation
c.
Contractionary monetary policy to combat recession
d.
Contractionary fiscal policy to combat recession
44. Policy coordination is complicated by
a.
Different economic objectives
b.
Different national institutions
c.
Different phases in the business cycle
d.
All of the above
TRUE/FALSE
1. A nation realizes internal balance if economy achieves full employment and price stability.
2. Nations have typically placed greater importance to the goal of internal balance than to the goal of
external balance.
3. A nation realizes external balance when its current account is in equilibrium.
4. A nation realizes overall balance when it achieves full employment and current account equilibrium.
5. Expenditure-changing policies modify the direction of aggregate demand, shifting it between domestic
output and imports.
6. Expenditure-switching policies include fiscal policy and monetary policy.
7. Economic policymakers have typically adopted expenditure-increasing policies to combat inflation
and expenditure-reducing policies to combat recession.
8. Expenditure-switching policies alter the level of total spending (aggregate demand) for goods and
services produced domestically and those imported.
9. Currency devaluation and revaluation are considered to be expenditure-changing policies since they
alter a country’s aggregate demand for goods and services.
10. Expenditure-switching policies include currency revaluation, currency devaluation, and direct controls
such as tariffs, quotas, and subsidies.
11. 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.
12. 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.
13. When the economy is in deep recession or depression, it is operating on that portion of its aggregate
supply curve that is horizontal.
14. Changes in a country’s net exports, investment spending, or government spending will cause its
aggregate demand curve to shift.
15. Given an open economy with high capital mobility, fiscal policy is strengthened under fixed exchange
rates.
16. Given an open economy with high capital mobility, monetary policy is strengthened under fixed
exchange rates.
17. Under floating exchange rates and high capital mobility, an expansionary monetary policy would help
a country resolve a recession and a current account deficit.
18. 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.
19. Currency devaluation and revaluation primarily affect the economy’s current account and have
secondary effects on domestic employment and inflation.
20. Fiscal and monetary policies are generally used to combat domestic recession and inflation and have
secondary effects on the balance of payments.
21. The Group of five (G-5) nations include Japan, Germany, China, and Australia.
22. The Bonn Summit of 1978 and Plaza Accord of 1985 are examples of international policy
coordination.
23. International policy coordination is plagued by differing national economic objectives, institutions,
political climates, and phases in the business cycle.
24. The goals of the Plaza Agreement of 1985 were to combat protectionism in the U.S. Congress,
promote world economic expansion by stimulating demand in Germany and Japan, and to ease the
burden of the U.S. debt service.
SHORT ANSWER
1. What policy instrument should be used when demand-pull inflation exists?
2. What happens to the balance of payments under a fixed exchange rate system, when expansionary or
contractionary monetary policy is used?
ANS:
ESSAY
1. Was the Plaza Agreement of 1985 a success?
2. What is international economic policy coordination?