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Instructor’s Manual
Instructor’s Manual
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in
1. Internal balance consists of full employment with price stability. External balance consists of balance-
of-payments equilibrium. Overall balance consists of internal balance plus external balance.
2. International economic policy makes use of expenditure-switching instruments (e.g., import tariffs) and
3. An expenditure-changing policy refers to a government's attempt to induce changes in aggregate
demand, via fiscal policy (e.g., taxes, government expenditures) or monetary policy (e.g., open market
operations, reserve requirements). An expenditure-switching policy attempts to divert expenditures
4. International economic policy formation faces political constraints such as society's willingness to bear
inflation or unemployment as part of the balance-of-payments adjustment process.
5. Under a system of fixed exchange rates and high capital mobility, an expansionary fiscal policy is
more successful in stimulating the economy, and an expansionary monetary policy is less successful,
than it is in a closed economy. This is because the initial and secondary effects of an expansionary
6. Policy agreement occurs when a given policy can improve two or more economic objectives at the
same time. Policy conflict occurs when a given policy improves one objective while detracting from
7. Obstacles to successful international economic policy coordination include: (1) different national
economic objectives, (2) different national institutions, (3) different national political climates, (4)
