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438 Final

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Suppose that the U.S. price of gold is $35 per ounce and the German price of gold is 100 Deutsche Marks (DMs) per ounce. What is the implied exchange rate between the dollar and the DM? A) $0.35 = DM1 B) $3500 = DM1 C) $2.8571 = DM1 D) $0.28571 = DM1

$0.35 = DM1

Consider the following information for a family. If the income for the family is $58,000, then an increase in income by $20,000 will result in an increase in consumption by: A) $15,000 if the MPC is 0.9. B) $10,000 if the MPC is 0.5. C) $12,000 if the MPC is 0.7. D) $1,000 if the MPC is 0.2.

$10,000 if the MPC is 0.5

Consider the following information for a family. The income for the family is $58,000; if the MPS is 0.25, and the income for the family decreases by $15,000, then the decrease in consumption will be: A) $3,750. B) $10,500. C) $11,250. D) $1,500.

$11,250

In 2002, $1 = 1 euro, and in 2006, $1 = 0.6 euro. If a Ferrari cost $100,000 in 2002, then it should have cost ______ in 2006. A) $160,000 B) $140,000 C) $166,666 100,000/.6 D) $60,000

$166,666

Suppose that the United States and the United Kingdom return to the gold standard. The United States sets the price of gold equal to $500 per ounce, and the United Kingdom sets the price of gold at £200 per ounce. What is the $-£ exchange rate? A) $0.40 = £1 B) $2.50 = £1 500/200 C) $500 = 1 ounce D) £200 = 1 ounce

$2.50 = £1

Suppose the MPC is 0.8 in Canada and the MPC h is 0.55. If income increases by $100 million in Canada, then the increase in consumption of foreign goods will be: A) $35 million. B) $25 million. C) $80 million. D) $100 million.

$25 million

Consider the following information for a family. The income for the family is $58,000; if the MPC is 0.6, and income increases by $13,000, then the increase in savings for the family is: A) $5,400. B) $5,200. C) $420. D) $7,800.

$5,200

Suppose the MPC is 0.8 in Canada and the MPC is 0.55 at Home. If income increases by $100 million in Canada, then the increase in consumption of domestic goods will be: A) $25 million. B) $80 million. C) $55 million. D) $35 million.

$55 million

If a basket of goods costs $100 in the United States and 300 pesos in Mexico, and if the exchange rate is $1 = 5 pesos, then the dollar price of the basket of goods in Mexico is: A) $250. B) $56. C) $60. 300/5 D) $75.

$60

-$90 billion

-270 billion pesos

-90 billion pesos

Under the gold standard system, if 1 ounce of gold was worth $23 in the United States and worth 15.5 pounds in Great Britain, then: A) $1 = 1.48 pounds. B) 1 pound = $1.48. 23/15.5 C) $1 = 365 pounds. D) 1 pound = $0.67.

1 pound = $1.48

Calculate the relative price of a basket of goods sold in the United States and Japan in terms of dollars if the yen/$ exchange rate = 90. The basket costs $100 in the United States and ¥9,000 in Japan. The relative price is: A) 0.9, which means the U.S. basket costs more. B) 1.1010, which means the Japanese basket costs more. C) 0.9, which means the Japanese basket costs more. D) 1.0, which means they both cost the same.

1.0, which means they both cost the same

If the amount of seigniorage is 50, the monetary supply is 1000, and the price level is 20, what is the inflation rate? A) 10% B) 50% C) 100% x/20 * 1000 = 50 D) 200%

100%

In the United States, for a $1 fall in state government revenue, the federal government increases transfers by: A) $2. B) $1. C) 30 cents. D) 15 cents.

15 cents

According to the text, what share of the world's countries now use floating exchange rate systems? A) 100% B) 70% C) 30% D) 15%

15%

Consider the following information on Mexico's trade. Thirty percent of the trade is conducted with country A, 55% of trade with country B, and 15% of trade with country C. If the peso appreciates 10% against country A, depreciates 30% against country B, and depreciates 10% against country C, then the effective trade-weighted real exchange rate experiences a: A) 15% appreciation. B) 15% depreciation. C) 25% depreciation. D) 20% appreciation.

15% depreciation

The ERM crisis in ______ affected the ability of nations to ______. A) 2001; fully fund their military forces B) 1996; allow labor to migrate between nations C) 1980; maintain a healthy banking system D) 1992; maintain fixed exchange rates without drastic domestic measures

1992; maintain fixed exchange rates without drastic domestic measures

As of 2016, there are ______ nations fully in the Eurozone, with ______ nations remaining outside the currency union. A) 40; 2 B) 19; 10 C) 35; 7 D) 10; 17

19; 10

In 1979, under the ERM, the member countries were pegged to the ECU, with a ______ band of fluctuation allowed. A) 2.5% B) 2.25% C) 1% D) 10%

2.25%

If the money supply is 1000, the price level is 5, and the inflation rate is 10%, what is the amount of seigniorage? A) 200 B) 100 C) 20 .1/5 * 1000 D) 5

In 2005: A) no Eurozone countries satisfied the criterion of having a government deficit of less than 3% of GDP. B) all Eurozone countries satisfied the criterion of having a government deficit of less than 3% of GDP. C) 25% of Eurozone countries did not satisfy the criterion of having a government deficit of less than 3% of GDP. D) only one Eurozone country satisfied the criterion of having a government deficit of less than 3% of GDP.

25% of Eurozone countries did not satisfy the criterion of having a government deficit of less than 3% of GDP

As of 2016, the European Union was composed of ______ countries. A) 12 B) 15 C) 28 D) 22

The nations of the European Union currently number _____, since _____ joined in 2013. A) 50; France and Germany B) 28; Croatia C) 150; Turkey and Greece D) 13; Mexico and Canada

28; Croatia

If the money supply is 2000, the price level is 20, and the inflation rate is 50%, what is the amount of seigniorage? A) 100 B) 50 C) 10 D) 5

Suppose that the United States does ½ of its trade with Canada, ¼ with the United Kingdom, and ¼ with Mexico. If the dollar real exchange rate rises by 10% with Canada, rises by 20% for the United Kingdom, and falls by 10% for Mexico, what is the percentage change in the real effective exchange rate? A) 11.5% B) 10% C) 7.5% D) -2.5%

7.5%

At its peak in 1913, the gold standard system had been adopted by_______ of countries. A) 85% B) 35% C) 13% D) 70%

70%

Which of the following has NOT been a criticism of the "convergence process" for joining the Eurozone? A) Although challenging, the process fully transforms inflation-biased nations into fiscal and monetary conservatives. B) Policies forced on applicants to monetary union are politically costly, so the interim peg may not be fully credible and may generate exchange rate crises. C) The fiscal rules are seen as inflexible and arbitrary. D) Once a nation has met the criteria, its commitment to fiscal discipline may wane.

Although challenging, the process fully transforms inflation-biased nations into fiscal and monetary conservatives

The direction of change in the trade balance is uncertain because expansionary monetary policy may exert forces in the opposite direction. What are they? A) An increase in income tends to lower the trade balance, whereas a fall in interest rates through depreciation tends to raise the trade balance. B) An increase in the supply of money raises interest rates, which lowers the trade balance, whereas the increase in the demand for money raises it. C) Exchange rates rise (depreciation) and expected exchange rates fall (appreciation). D) An increase in financial assets raises foreign inflows and raises the trade balance, whereas decreases in interest rates lower the trade balance.

An increase in income tends to lower the trade balance, whereas a fall in interest rates through depreciation tends to raise the trade balance

The goods market adjusts to an equilibrium right at the point of the Keynesian cross. Why? A) At that point, the Keynesian theory of sticky prices is correct. B) At only that point, total spending is equal to total production. C) At only that point, consumers are fully satisfied and firms have maximized profits. D) At only that point, the unemployment rate is zero and workers need not seek higher wages.

At only that point, total spending is equal to total production

The original six nations that formed the European Economic Community (EEC) were: A) Spain, Portugal, Italy, Austria, Germany, and the United Kingdom. B) France, Bulgaria, Romania, Luxembourg, East Germany, and Russia. C) Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany. D) Hungary, Austria, Germany, Poland, Belgium, and the United Kingdom.

Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany

Two nations that did not fully recover from the 1992 crisis and are not members of the Eurozone as of 2016 are: A) France and Germany. B) Britain and Sweden. C) Italy and Greece. D) Spain and Portugal.

Britain and Sweden

In the example of the peg between Britain and Germany, what would have been the case if Britain had allowed the pound to float and depreciate after Germany's GDP rise? A) Britain would have suffered depreciation and a recession. B) Britain would have had to raise interest rates. C) Britain would no longer be eligible to join the new euro currency. D) Britain could have lowered interest rates and enjoyed an added boost to GDP.

Britain could have lowered interest rates and enjoyed an added boost to GDP

Since Britain withdrew from the ERM in 1992, what has it done with regard to fixing its exchange rates? A) Britain has joined with the euro, forgoing its long-standing independence. B) Britain has put the pound back on solid footing by backing it with gold. C) Britain has retained its independent pound currency and not joined the currency union of Europe. D) Britain has abandoned its own monetary authority for the certainty of fixed exchange rates with its largest trading partners.

Britain has retained its independent pound currency and not joined the currency union of Europe

(Figure: Shocks and Integration) Suppose that policymakers in Colombia, Peru, and Uruguay care only about being able to use policy in response to shocks? Using the graph, which of the following is most likely to join a currency area with the other countries? A) Colombia B) Peru C) Uruguay D) Peru and Colombia

Colombia

(Figure: Shocks and Integration) The graph shows hypothetical OCA economic criteria for several South American countries. Using the graph, which of the following best satisfy the OCA criteria for forming a monetary union? A) Peru and Colombia B) Peru and Uruguay C) Venezuela and Uruguay D) Colombia and Venezuela

Colombia and Venezuela

Why wasn't the stimulus passed in 2009 effective in reducing unemployment during the recession of 2009-10? A) Congress cut the size of the final package, it was skewed toward tax cuts, and it was only 25% of the amount needed to restore GDP to full employment. B) The administration mismanaged it—and it was much too large. C) Fiscal policy is ineffective in a liquidity trap. D) Tax cuts and interest rate cuts would have been effective, but they were politically undesirable.

Congress cut the size of the final package, it was skewed toward tax cuts, and it was only 25% of the amount needed to restore GDP to full employment

The TB (i.e., X - M) is part of the short-run spending equation. With sticky prices, what would be the effect on the TB with an increase (a real depreciation) of the home nation's exchange rate? A) Consumers in the home nation would find it more expensive to buy domestic goods compared with foreign goods, and the TB would decrease. B) Consumers in the home nation would cut back on both domestic and foreign goods and the TB would decrease. C) Consumers in the home nation would increase spending on both domestic and foreign goods, and the TB would be unchanged. D) Consumers in the home nation would increase spending on domestic goods and decrease spending on foreign goods, causing the TB to increase.

Consumers in the home nation would increase spending on domestic goods and decrease spending on foreign goods, causing the TB to increase

The advantages of a currency union may extend to political relationships, too. How? A) Currency unions, unfortunately, create political dissension. B) Currency unions can be used by the larger nations to grab political power. C) Currency unions reduce each nation's individual political power. D) Currency unions enhance each nation's identification with other nations in the currency union.

Currency unions enhance each nation's identification with other nations in the currency union

Which of the following countries is part of the ERM but NOT part of the Eurozone? A) France B) Italy C) Spain D) Denmark

Denmark

After the formation of the European Community (EC), three new nations were admitted in 1973 based on their conformance and compatibility with existing democratic norms, economic stability, and economic development. The nations were: A) Portugal, Spain, and Finland. B) Belgium, the Netherlands, and Luxembourg. C) Denmark, Ireland, and the United Kingdom. D) Italy, Greece, and Turkey.

Denmark, Ireland, and the United Kingdom

Which would be easier to reverse? For Denmark, which now pegs its national currency to the euro, to choose monetary autonomy and abandon its peg, or for Italy to switch back from the euro to the lira? A) Italy, because all it has to do is cash euros for lire B) Italy, because it can change over to an electronic payments system C) Denmark, because it would only have to return all the euros in its treasury D) Denmark, because it would not have to change its currency, accounting structure, nor reprint domestic currency

Denmark, because it would not have to change its currency, accounting structure, nor reprint domestic currency

If the trade surplus has fallen, which of the following is a possible explanation? A) The real exchange rate rose. B) Foreign income fell. C) Domestic income fell. D) The foreign price level rose.

Domestic income fell

The European Monetary System (EMS) relied on the ______ to maintain fixed rates of exchange, but in 1992, several notable defections from the system created doubt that a monetary union could occur. A) euro B) U.S. dollar C) the European currency unit (ECU) D) ERM

ERM

The collapse of the Bretton Woods system of fixed exchange rates during the 1970s prompted the EC to establish its own system. It was called the: A) Marshall Plan. B) European Currency Union (ECU). C) European Monetary System (EMS). D) lend-lease plan.

European Monetary System (EMS)

The common currency area in Europe is called the: A) common market. B) Eurozone. C) euromark. D) European Union.

Eurozone

How does the ECB choose to define price stability? A) Eurozone consumer price inflation of less than but close to 2% per year over the medium term B) consumer price inflation of greater than but close to 3% per year over the medium term in all Eurozone countries C) Eurozone consumer price inflation equal to 0% per year over the medium term D) Eurozone consumer price inflation less than but close to 5% per year over the medium term

Eurozone consumer price inflation of less than but close to 2% per year over the medium term

Which of the following would NOT lead to crowding out? A) Expansionary fiscal policy depreciates the exchange rate. B) Expansionary fiscal policy raises foreign income. C) Expansionary fiscal policy raises the money supply. D) Expansionary fiscal policy increases net exports.

Expansionary fiscal policy increases net exports

Which of the following countries is a member of the Eurozone? A) Sweden B) Finland C) Norway D) Switzerland

Finland

When exchange rates are fixed and the foreign nation's interest rate increases, what happens next? A) The home nation's IS curve shifts out because of a depreciation and an increase in the trade balance. B) The home nation's LM curve shifts right, and its interest rate falls. C) Fixed exchange rates force the home nation to raise its interest rates. D) The home nation and the foreign nation are always in equilibrium, so no changes occur.

Fixed exchange rates force the home nation to raise its interest rates

Compared with France, who stayed in the ERM, what was the result of Britain's exit? A) France's economy performed a bit better. B) Britain had an economic recession while France enjoyed an expansion. C) There was no significant difference. D) France had an economic recession while Britain enjoyed an expansion.

France had an economic recession while Britain enjoyed an expansion

The European Central Bank is located in ______, probably as a result of ______ influence on European monetary policy because of its above-average economic performance. A) London; Britain's B) Paris; France's C) Frankfurt; Germany's D) Geneva; Switzerland's

Frankfurt; Germany's

If we start from long-run general equilibrium of goods, forex, and the money markets, and there is a temporary expansion of the money supply, what will be the outcome? A) GDP rises, the interest rate falls, and the exchange rate rises (depreciation). B) GDP rises, the interest rate rises, and the exchange rate falls (appreciation). C) GDP falls, the interest rate falls, and the exchange rate rises (depreciation). D) GDP falls, the interest rate rises, and the exchange rate rises (depreciation).

GDP rises, the interest rate falls, and the exchange rate rises (depreciation)

In domestic economies, inflation bias often exists, which reduces the power of the central bank to use monetary policy to stimulate economic activity. If an anti-inflation nation such as Germany enters into a monetary union with such nations, what remedy is there for this problem? A) Germany would have to conform with an activist monetary policy that gave preference to economic performance. B) Germany could insist on the central bank being insulated from politics and democratic control. C) Germany could insist that all central bank policies be reviewed by the Parliament. D) Germany would allow nations into the monetary union, even with their inflation bias, because that would disappear quickly on joining the Eurozone.

Germany could insist on the central bank being insulated from politics and democratic control

The ECB's focus on restraining inflation is, in large part, a result of: A) Europe's experience with inflation during the 1960s. B) Germany's experience with hyperinflation during the period between the first and second world wars. C) the ECB's distrust of some of its smaller member countries (e.g., Finland, Portugal). D) its monetary policy having no effect on economic growth.

Germany's experience with hyperinflation during the period between the first and second world wars

During the late nineteenth century, the gold standard was a subject of controversy. Why? A) Businesses resented fixed exchange rates because of their inability to raise or lower prices. B) Gold flows were erratic and resulted in a series of large economic swings—booms and busts. C) Prices were stable and predictable, but profits fell. D) Governments cheated on printing money, causing inflation problems all over the world.

Gold flows were erratic and resulted in a series of large economic swings—booms and busts

The practice of the ECB and national central banks of preventing massive bank failures after the financial crisis of 2008 had what effect on the affected economies? A) Prevention of bank failures greatly reduced the pain of the crisis for taxpayers. B) Prevention of bank failures ended up not saving most banks anyway. C) Banks resisted the takeover by the ECB and refused to make additional credit available. D) Governments financed the bailouts by issuing more domestic debt, which caused extreme fiscal problems.

Governments financed the bailouts by issuing more domestic debt, which caused extreme fiscal problems

The Keynesian model of aggregate demand includes: I. government purchases and taxes. II. consumer spending and investment spending. III. exports plus imports. A) I only B) I and II only C) II and III only D) I, II, and III

I, II, and III

Which of the following statements is correct? I. The ERM used the Deutsche Mark as the base or center currency. II. The ERM allowed the Italian central bank autonomy over its policies. III. The ERM allowed the Bundesbank monetary autonomy. A) I only B) II only C) III only D) I, II, and III

I, II, and III

Reunification of East and West Germany created which sequence of events? I. an increase in German rates of interest II. a boom in German output and a shift to the right of the German IS curve III. large reunification costs financed by increased government spending IV. an increase in rates of interest in ERM nations A) IV, I, III, I B) III, II, I, IV C) I, II, III, IV D) IV, III, II, I

III, II, I, IV

Consider the IS-LM curves for an economy with flexible exchange rates. An increase in the foreign income will result in the: A) LM curve shifting to the right. B) IS curve shifting to the right. C) LM curve shifting to the left. D) IS curve shifting to the left.

IS curve shifting to the right

All else being equal, an increase in government spending would shift the ______ line to the ______, causing interest rates to _______ and the trade balance to _______. A) LM; right; fall; fall B) IS; right; rise; rise C) LM; left; rise; rise D) IS; right; fall; fall

IS; right; rise; rise

A cost-benefit analysis can be done to assess whether a nation should fix its exchange rate. Which of the following is NOT correct? A) If market integration or symmetry increase, then the net benefits of a fixed exchange rate increase. B) If the net benefits are negative, economically speaking the nation should float. C) If the net benefits are positive, economically speaking the nation should float. D) If the net benefits turn negative, the nation should fix.

If the net benefits are negative, economically speaking the nation should float

When comparing monetary and fiscal policy under fixed and floating exchange rate regimes, which of the following statements is FALSE? A) In a floating exchange rate regime, an expansionary monetary policy is effective by stimulating spending and by depreciating the currency. B) In a floating exchange rate regime, an expansionary fiscal policy is effective by stimulating spending, though there may be crowding-out effects due to higher rates of interest and currency appreciation. C) In a fixed exchange rate regime, an expansionary monetary policy is effective by stimulating spending; it has no impact on the currency value or the trade balance. D) In a fixed exchange rate regime, an expansionary fiscal policy is effective by stimulating spending, as long as the parallel expansionary monetary policy keeps exchange rates stable.

In a fixed exchange rate regime, an expansionary monetary policy is effective by stimulating spending; it has no impact on the currency value or the trade balance

If consumption has fallen, which of the following could be true? A) Taxes have fallen. B) Income has fallen. C) Taxes and income have fallen. D) Disposable income has risen.

Income has fallen

Suppose that there are two countries (Ireland and Belgium) negotiating the government debt criteria for the Eurozone. Ireland has a high ratio of government debt to GDP; Belgium has a low ratio of debt to GDP. Which country is likely to prefer a higher inflation target? A) Belgium, because the real value of its government debt will approach zero faster than Ireland's over time B) Ireland, because higher inflation will cause larger absolute reductions in the real value of its government debt than in Belgium C) It makes no difference because high rates of inflation will have proportional effects on the real debt of both countries. D) both, because each wants to see its real government debt decline

Ireland, because higher inflation will cause larger absolute reductions in the real value of its government debt than in Belgium

What was the response to Germany's expansionary fiscal policy from the German central bank, the Bundesbank? A) It expanded the money supply to ease rates of interest. B) It made no policy changes. C) It contracted the money supply and raised interest rates. D) It began the process of reverting to a gold standard.

It contracted the money supply and raised interest rates

When the marginal propensity to consume foreign imports (MPC F ) rises, ceteris paribus, what happens to the trade balance? A) It increases. B) It decreases. C) It depends on what happens to the MPC of domestic goods. D) It will not change.

It decreases

When income levels in the home nation increase, what is the effect on the home TB? A) It decreases because of expenditure switching. B) It decreases because of an increase in imports. C) It increases because of an increase in exports. D) It increases because of expenditure switching.

It decreases because of an increase in imports

What happened to the international gold standard during WWI? A) It flourished, since no nation trusted the other nations' currencies. B) It was abandoned. C) It did not disappear but was weakened by a major decline in international trade. D) It was relegated to government control.

It did not disappear but was weakened by a major decline in international trade

Which of the following does NOT describe why Britain adopted the pegged system (the Exchange Rate Mechanism [ERM]) in 1990? A) There were benefits to trade and other forms of cross-border exchange. B) Britain wanted to hold onto the pound as its currency. C) It was a member of the European Union and fixed rates were good for trade with other members. D) It hoped to participate in the new common currency when it was launched.

It hoped to participate in the new common currency when it was launched

When income levels in the rest of the world increase, what is the effect on the home TB? A) It decreases because of expenditure switching. B) It decreases because of an increase in imports. C) It increases because of an increase in exports. D) It increases because of expenditure switching.

It increases because of an increase in exports

In terms of importance, what place does the advent of the euro hold in economic history? A) It is an important innovation in the evolution of fixed exchange rates. B) It is an interesting experiment from which we can learn lessons. C) It is a bold experiment, affecting hundreds of millions of people in one of the most prosperous economic regions. D) In the grand scheme of things, the euro is less important than the fixed exchange rate scheme devised in Bretton Woods, New Hampshire.

It is a bold experiment, affecting hundreds of millions of people in one of the most prosperous economic regions

A key benefit for nations in a politically integrated currency union such as the United States is the existence of fiscal federalism. What is the status of fiscal federalism in the Eurozone? A) It is almost nonexistent because few fiscal transfers take place. B) It is thriving and encompasses many aspects of the economy. C) Most believe it currently lags the United States, but the situation is very fluid and will change soon. D) Fiscal federalism is a concept that has relevance only in the United States because each Eurozone nation is completely independent.

It is almost nonexistent because few fiscal transfers take place

What is the real exchange rate? A) It is the ratio of the domestic cost of a foreign basket of products compared with the cost of the same domestic basket of products. B) It is the exchange rate minus the rate of domestic inflation. C) It is the exchange rate plus the rate of domestic inflation. D) It is the original exchange rate that was in effect when the nations were on a gold standard

It is the ratio of the domestic cost of a foreign basket of products compared with the cost of the same domestic basket of products

In the case of a currency union, what is a nominal anchor? A) It is the weight of the efficiency loss from changing to a common currency. B) It is an independent value, such as the value of the common currency unit, constraining the ability of a nation to inflate its currency and prices. C) It is a nominal measure of GDP that is not the same as the measure for real GDP. D) It links that nation to other members of the currency union and permits no trade or financial relationships outside the union.

It is the weight of the efficiency loss from changing to a common currency

If taxes fall and foreign income falls, what will happen to output, ceteris paribus? A) It will rise. B) It will stay the same. C) It will fall. D) It is uncertain what will happen.

It is uncertain what will happen

In September 1992, Great Britain changed its exchange rate system. How? A) It abandoned the gold standard in favor of pegging to the U.S. dollar. B) It joined in with the new euro. C) It switched from an exchange rate peg to floating. D) It abandoned the sterling backing for the British pound.

It switched from an exchange rate peg to floating

The financial crisis of 2008 resulted in extreme policy measures by the Federal Reserve. Which of the following is the BEST characterization of its policy? A) It was a complete reversion to the idea that eventually the economy is self-correcting and the best policy is to wait it out. B) It was a massive injection of liquidity to banks and major purchases of U.S. government securities, which resulted in a near-zero federal funds rate. C) It was a moderate approach that limited monetary growth to the rate of growth of real GDP. D) It was based on a realization that the Federal Reserve was ineffective in the face of such a crisis.

It was a massive injection of liquidity to banks and major purchases of U.S. government securities, which resulted in a near-zero federal funds rate

Suppose that Argentina's dollar-denominated external assets and liabilities are $10 billion and $100 billion, respectively, and its Argentine peso-denominated external assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes its exchange rate at P1 = $US1. What is the likely effect of the change in Argentina's external wealth on Argentine aggregate demand as a result of the devaluation of the peso (from P1 = $US1 to P3 = $US1)? A) It will increase Argentine aggregate demand. B) It will decrease Argentine aggregate demand. C) It will neither increase nor decrease Argentine aggregate demand. D) It will first increase, then decrease Argentine aggregate demand.

It will decrease Argentine aggregate demand

If the interest rate rises and government spending falls, what will happen to output, ceteris paribus? A) It will rise. B) It will stay the same. C) It will fall. D) It is uncertain what will happen.

It will fall

Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. What is likely to happen to U.S. GDP following the leftward shift of its IS curve? A) It will rise. B) It will fall. C) It will not change. D) It will rise dramatically.

It will fall

After a depreciation of the home currency, what is the situation with a nation's external wealth? A) It will rise if external liabilities exceed external assets. B) It will fall if external liabilities exceed external assets. C) It will rise if domestic liabilities exceed domestic assets. D) It will fall if domestic liabilities exceed domestic assets.

It will fall if external liabilities exceed external assets

Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. What will happen to the Canadian IS curve as a result of the leftward shift of the U.S. IS curve? A) It will shift rightward. B) It will shift leftward. C) It will not change. D) The IS curve will show an increase.

It will shift leftward

Suppose that the United Kingdom pegs the pound to the euro. If all other things remain unchanged, what would you expect to happen to European GDP if all countries who use the euro decided to adopt contractionary fiscal policies? A) It would rise. B) It would fall. C) It would not change. D) That cannot be determined using the information provided.

It would fall

Because of the ERM, if Britain desires to maintain fixed exchange rates, then what would Britain be forced to do after German reunification? A) It would increase its interest rate and follow the central country's lead. B) It would ignore the increase in the German interest rate and hope for the best. C) It would change over to an exchange rate regime based on gold. D) It would decrease its interest rate to stimulate its economy

It would increase its interest rate and follow the central country's lead

Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. What might the U.S. Federal Reserve do to offset the macroeconomic effect of the leftward shift in the U.S. IS curve? A) It would increase the money supply. B) It would decrease the money supply. C) It would not change its monetary policy. D) It would not change its fiscal policy

It would increase the money supply

In the example of the peg between Britain and Germany, what would have been the case if Britain had adhered to the pegged exchange rate? A) It would not have had the option of raising its own rate. B) It would have been able to inflate its currency to keep output stable. C) It would not have been able to inflate its currency to keep output stable. D) It would have had to raise taxes and balance its budget.

It would not have been able to inflate its currency to keep output stable

If the United States cuts its government budget deficit, what impact would there be on the IS curve? A) It would shift right due to higher levels of total spending. B) It would shift left due to lower levels of total spending. C) It would shift left because of lower levels of total spending, and it would shift right if U.S. interest rates decline due to lower borrowing. D) It would shift left because of higher nominal and real interest rates due to increased borrowing.

It would shift left because of lower levels of total spending, and it would shift right if U.S. interest rates decline due to lower borrowing

The country that did NOT opt out of the currency union is: A) United Kingdom. B) Sweden. C) Denmark. D) Italy.

Italy

Although Europe is not an OCA, some areas in the European Union would probably meet the criteria. Which of the following would meet them? A) France, Sweden, and Denmark B) the former Eastern bloc nations of Yugoslavia, Romania, and Bulgaria C) the Netherlands, Denmark, and Britain D) Italy, Germany, Austria, Belgium, the Netherlands, and Luxembourg

Italy, Germany, Austria, Belgium, the Netherlands, and Luxembourg

What would happen to a low-income nation if its liability currency appreciated against its own currency? A) Its external wealth would rise because low-income nations have more assets than liabilities. B) Its external wealth would not be affected because currency values are fixed. C) Its external wealth would fall because low-income nations tend to have more external liabilities denominated in other currencies. D) Its external wealth would rise because of the ability of its monetary authority to print more money.

Its external wealth would fall because low-income nations tend to have more external liabilities denominated in other currencies

The short-run model makes use of the ______, which assumes that private consumption expenditure is sensitive to changes in current income. A) Pareto-optimal condition B) consumer sovereignty model C) Keynesian consumption function D) consumption-smoothing model

Keynesian consumption function

A set of combinations of nominal interest rates and GDP, for which the demand for money is equal to the supply of money, is the: A) IS curve. B) aggregate expenditure line. C) supply curve. D) LM curve.

LM curve

When developing countries borrow in international credit markets, many find that they must borrow in currencies other than their own (such as dollars, yen, or euros). Why are international creditors willing to make loans in dollars, yen, or euros but not in the developing countries' currencies? A) Lenders are not well-informed about developing countries' economic situations. B) Lenders believe that the currencies of developing countries will always appreciate. C) Lenders receive higher interest rates on loans in dollars, yen, or euros than on loans made in the currencies of developing countries. D) Lenders believe that developing countries have a history of weak macroeconomic management and imprudent monetary and fiscal policies.

Lenders believe that developing countries have a history of weak macroeconomic management and imprudent monetary and fiscal policies

Britain's decision to exit the ERM in September 1992 had what effect? A) Lower interest rates and a depreciated exchange rate caused the British economy to expand. B) It subjected Britain to a ruling by the European Courts of Justice. C) It caused the system to collapse. D) It had no effect on Britain's economy.

Lower interest rates and a depreciated exchange rate caused the British economy to expand

The European Monetary Union was formed in 1992 to explore issues regarding currency union under the ________ treaty. A) Versailles B) Paris C) Berlin D) Maastricht

Maastricht

Suppose that Argentina's dollar-denominated external assets and liabilities are $10 billion and $100 billion, respectively, and its Argentine peso-denominated external assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes its exchange rate at P1 = $US1. How was Argentina's net external wealth affected as a result of the devaluation of the peso (from P1 = $US1 to P3 = $US1)? A) Net external wealth rose. B) Net external wealth fell. C) Net external wealth was not affected. D) One cannot determine how net external wealth was affected with the information provided

Net external wealth fell

If domestic and foreign prices rise by the same relative amount, what will happen to the trade balance? A) It will rise. B) Nothing will happen. C) It will fall. D) Not enough information is provided to answer the question.

Nothing will happen

Which of the following countries is NOT a member of the Eurozone? A) Germany B) Ireland C) Spain D) Poland

Poland

The idea of a currency union was initially proposed by: A) John Maynard Keynes. B) Paul Samuelson. C) Robert Mundell. D) Alan Greenspan

Robert Mundell

Suppose that the United States and the United Kingdom both use the gold standard. Their prices of gold are $35 = 1 ounce and £7 = 1 ounce, which yields an implied exchange rate of $5 = £1. Now suppose that the exchange rate temporarily rises to $5.50 = £1. What actions would you follow to take advantage of this temporary opportunity for arbitrage? A) Sell gold for pounds in the United Kingdom, buy dollars with pounds in currency markets, and buy gold with dollars in the United States. B) Sell gold for dollars in the United States, buy pounds with dollars in currency markets, and buy gold with pounds in the United Kingdom. C) Sell gold for dollars in the United States, sell pounds for dollars in currency markets, and buy gold with dollars in the United Kingdom. D) Sell gold for dollars in the United Kingdom, buy pounds with dollars in currency markets, and buy gold with pounds in the United States.

Sell gold for pounds in the United Kingdom, buy dollars with pounds in currency markets, and buy gold with dollars in the United States

Why do symmetric shocks not disturb fixed exchange rate systems? A) Symmetric shocks happen only once and cause a one-time shift in interest rates. B) Symmetric shocks imply differences in rates of interest, which is irrelevant to fixed exchange rate systems. C) A demand shock can easily be dealt with using domestic policies that do not involve other nations. D) Symmetric shocks require the same medicine in both economies, so monetary policy will be in a direction to help both situations.

Symmetric shocks require the same medicine in both economies, so monetary policy will be in a direction to help both situations

During Britain's brief alignment with the ERM from 1990-1992, the trilemma tells us that monetary policy authority no longer existed in Britain. Why? A) Britain could print more pounds, but could not increase its gold stock. B) Britain kept monetary growth rates at zero. C) The British interest rate equaled the German rate to attain uncovered interest parity. D) The British could lower unemployment using other means such as fiscal policy.

The British interest rate equaled the German rate to attain uncovered interest parity

In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, what will Britain have to do in order to maintain its exchange rate peg? A) The British would be forced to increase their interest rates. B) The British would increase their money supply. C) The British would have to lower their interest rates. D) The British government would have to use expansionary fiscal policy.

The British would be forced to increase their interest rates

Denmark is not a member of the Eurozone but is a member of the ERM. What are the advantages to Denmark of NOT being a member of the Eurozone? A) There are none. Denmark stubbornly wants to have its own currency (the krone). B) The Danish central bank loses its monetary autonomy by not joining the Eurozone. C) There are not very many transactions between Denmark and Eurozone countries, so transaction gains from membership in the Eurozone would be small for Denmark. D) The ERM allows much more exchange rate flexibility (+/- 15%) than the Eurozone.

The ERM allows much more exchange rate flexibility (+/- 15%) than the Eurozone

If the demand for money increases, what happens in the IS-LM framework? A) The IS curve shifts right. B) The LM curve shifts right. C) The IS curve shifts left. D) The LM curve shifts left.

The LM curve shifts left

If the supply of money increases, what happens in the IS-LM framework? A) The IS curve shifts right. B) The LM curve shifts right. C) The IS curve shifts left. D) The LM curve shifts left.

The LM curve shifts right

Suppose that international trade is the only kind of international transaction between the United States and Canada. The United States currently is experiencing a balance of trade deficit with Canada. What would happen to the United States and Canadian money supplies if the United States and Canada both used the gold standard? A) The U.S. money supply would rise and the Canadian money supply would fall. B) Both the U.S. and Canadian money supplies would rise. C) The U.S. money supply would fall and the Canadian money supply would rise. D) Both the U.S. and the Canadian money supplies would fall.

The U.S. money supply would fall and the Canadian money supply would rise

The U.S. money supply would fall and the U.K. money supply would rise

If the center nation operates under a cooperative peg agreement, how does the cooperation work? A) The home nation will try to resist any changes coming from the center. B) The home nation will accept all changes coming from the center without discussion. C) The center nation will make policy concessions to other nations in its cooperative currency agreement. D) Cooperation usually does not work well.

The center nation will make policy concessions to other nations in its cooperative currency agreement

When there are currency depreciations or appreciations, how is the external wealth of a nation affected? A) It rises (along with its GDP) when there is a depreciation and falls with an appreciation. B) It usually does not change because external wealth is related to gold and capital. C) The change in wealth depends on the exchange rates with the currencies in which the assets or liabilities are denominated. D) If all assets are domestic and all liabilities are foreign, wealth always rises when there is any kind of exchange rate shift.

The change in wealth depends on the exchange rates with the currencies in which the assets or liabilities are denominated

If two nations both peg to a center nation, and one devalues its exchange rate against the other partner (noncooperatively) and to the center as a result of a demand shock, what is the effect? A) The center nation will require that the two line up their rates. B) The devaluing nation will see an increase in demand while the other partner sees a decrease (thus sharing the effect of the demand shock). C) The devaluing nation will devalue more steeply and will see a larger increase in demand while its partner will suffer more (thus favoring the devaluing nation). D) Both nations will suffer more because the center nation will match the devaluation, thus negating the effect.

The devaluing nation will devalue more steeply and will see a larger increase in demand while its partner will suffer more (thus favoring the devaluing nation)

If two nations both peg to a center nation, and one devalues its exchange rate against the other partner (cooperatively) and to the center as a result of a demand shock, what is the effect? A) The center nation will require that the two line up their rates. B) The devaluing nation will see an increase in demand while the other partner sees a decrease (thus sharing the impact of the demand shock). C) The devaluing nation will see a larger increase in demand while its partner will suffer more (thus favoring the devaluing nation). D) Both nations will suffer more because the center nation will match the devaluation, thus negating the effect.

The devaluing nation will see an increase in demand while the other partner sees a decrease (thus sharing the impact of the demand shock)

Which of the following cases is an OCA that is NOT preferred by a home country? A) The home country faces symmetric shocks with the other country. B) The labor market is well integrated, allowing for migration. C) The home country faces asymmetric shocks with the other country. D) The home economy is well integrated with the other country, carrying out vast amounts of trade.

The home country faces asymmetric shocks with the other country

What is the most powerful argument against a fixed exchange rate? A) The nation must administer the rates at all currency exchange venues, and it is expensive to do. B) The nation usually gets opposition from other trading partners who are excluded. C) The nation has to have a large store of gold on hand to exchange at fixed rates. D) The nation gives up its ability to control its money supply and affect its own interest rates.

The nation gives up its ability to control its money supply and affect its own interest rates

Borrowing in one's own currency has many advantages for low-income nations (such as Chile). Which of the following is NOT an advantage? A) Service payments are usually retained in the nation. B) Defaults are typically not an issue. C) The nation is never obliged to repay—it can roll over the debt in perpetuity. D) More national debt actually helps credit markets deepen and mature.

The nation is never obliged to repay—it can roll over the debt in perpetuity

The text compares the macroeconomic performance of Great Britain and France immediately following Great Britain's departure from the ERM in 1992. What does it conclude? A) The rate of growth of real GDP was higher in France than in Great Britain. B) The rate of growth of real GDP was lower in France than in Great Britain. C) The rates of growth of real GDP were equal in France and in Great Britain. D) GDP growth of both Great Britain and France increased dramatically after Great Britain withdrew from the ERM.

The rate of growth of real GDP was lower in France than in Great Britain

If domestic income falls, what must happen to keep the trade balance the same? A) The real exchange rate must fall. B) Foreign income must rise. C) The domestic price level must fall. D) Domestic income must fall.

The real exchange rate must fall

Many large developing countries with large dollar-denominated external liabilities experienced large depreciations of their currencies between 1990 and 2003. What effects, if any, did these depreciations have on these countries' external wealth and their GDPs? A) Both their external wealth and their GDPs fell. B) Their external wealth fell and their GDPs rose. C) Their external wealth rose and their GDPs fell. D) The depreciations reduced their external wealth but had no effect on their GDPs.

Their external wealth fell and their GDPs rose

More borrowing by firms in the domestic currency is one way to reduce currency mismatch. What would be the major issue if government insured repayment of the loans at a low cost? A) There would be lots of new borrowing, and the production sector might not be able to keep pace. B) It would be too expensive. C) There could be a moral hazard problem with excessive risk taking. D) It is likely that no new borrowing would take place—firms need the incentive of tax breaks.

There could be a moral hazard problem with excessive risk taking

Which is the best characterization of the current international payments system? A) The World Bank and the IMF approve nations' exchange rate regimes and ensure that financial flows are not hampered by imbalances. B) All nations are now operating with floating exchange rates and free capital flows. C) The four richest industrial nations have floating exchange rates, while the rest of the nations peg to those currencies. D) There is no standard and no rules, and each nation chooses the regime that works best for its individual situation at the time.

There is no standard and no rules, and each nation chooses the regime that works best for its individual situation at the time

Why are cooperative arrangements difficult to negotiate and maintain? A) They require a long-term policy commitment, but politics is often focused on the short run. B) No one understands the benefits and consequences. C) Trading nations do not trust one another. D) They have to be approved by the IMF, which takes years to accomplish.

They require a long-term policy commitment, but politics is often focused on the short run

By early 2010, which of the following situations existed in the Eurozone debtor nations? A) They had resolved their bank failures and restored fiscal responsibility. B) They had sought and received help from the United States and the IMF to finance their financial sector bailouts. C) They were in worse shape as debt grew to alarming levels, external investors were worried, and their bond ratings plummeted. D) By that time, the debtor nations had repaid more than 90% of outstanding external debt.

They were in worse shape as debt grew to alarming levels, external investors were worried, and their bond ratings plummeted

Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. Now suppose that the increase in the price of oil in the second half of 2007 causes the IS curve in the United States to shift to the left. If all other things remain unchanged, what will happen to U.S. interest rates? A) They will rise. B) They will fall. C) They will not change. D) They will rise dramatically.

They will fall

Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. What will happen to Canadian interest rates as a result of the leftward shift of the U.S. IS curve? A) They will rise. B) They will fall. C) They will not change. D) The IS curve will show an increase.

They will fall

Do the costs of forming a currency union fall or rise as the degree of labor market integration rises among member countries? A) They will rise because any macroeconomic shock in one country will be transmitted to other members when there is greater labor market integration. B) They will fall because labor market integration allows labor to move to other member countries when there are negative macroeconomic shocks at home. C) They will rise because labor market integration allows labor to move to other member countries when there are negative macroeconomic shocks at home. D) The costs of forming a currency union do not depend at all upon the degree of labor market integration among member countries.

They will fall because labor market integration allows labor to move to other member countries when there are negative macroeconomic shocks at home

Suppose that the United Kingdom pegs the pound to the euro and the European Central Bank decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. How would the European Central Bank's monetary policy affect European interest rates? A) They would rise. B) They would fall. C) The combination of the expansionary fiscal policy and the monetary policy would cause interest rates to return to their level prior to the expansionary fiscal policy. D) The combination of the expansionary fiscal policy and the monetary policy would not affect interest rates.

They would rise

Suppose that the United Kingdom pegs the pound to the euro. If all other things remain unchanged, what would you expect to happen to European interest rates if all countries who use the euro decided to adopt expansionary fiscal policies? A) They would rise. B) They would fall. C) They would not change. D) That cannot be determined using the information provided.

They would rise

Assume the economy is in equilibrium. If the interest rate falls, what sequence of events will return the economy to equilibrium? A) Total spending rises as investors move funds into foreign assets, causing the exchange rate to rise (depreciate), and the trade balance increases, causing output to rise. B) Savers save more to replace lost interest earnings, consumption falls, imports rise, and the trade balance falls, causing output to fall. C) Total spending falls, unemployment rises, government transfers increase, inflation rises, and the exchange rate falls (appreciates). D) Bond prices rise, causing foreign investment to flow in, causing the exchange rate to fall (appreciate).

Total spending rises as investors move funds into foreign assets, causing the exchange rate to rise (depreciate), and the trade balance increases, causing output to rise

The earliest beginning of the European Union was the: A) Maastricht Treaty. B) Treaty of Rome. C) Paris Accord. D) Louvre Accord.

Treaty of Rome

In 2002, $1 = 1 euro, and in 2006, $1 = 0.6 euro. If the price of a Ferrari was $125,000 in 2006, then: A) U.S. consumers partially benefited, even though the dollar depreciated. B) U.S. consumers paid the full price because of the depreciated dollar. C) U.S. consumers benefited because of the appreciation of the dollar. D) one can say that the J curve effect is not valid.

U.S. consumers partially benefited, even though the dollar depreciated

(Figure: Shocks and Integration) Using the graph, which of the following has the highest degree of market integration with the other countries? A) Peru and Colombia B) Peru and Uruguay C) Venezuela and Uruguay D) Venezuela

Venezuela

Which of the following is a general rule for how demand shocks affect the IS curve? A) Demand shocks will always show up as changes in the expected real exchange rate. B) Demand shocks are usually rare and have little effect. C) When any exogenous variable works to increase demand, IS shifts to the right and, conversely, when any exogenous variable works to decrease demand, IS shifts to the left. D) When any exogenous variable works to increase demand, IS shifts to the left and conversely, when any exogenous variable works to decrease demand, IS shifts to the right.

When any exogenous variable works to increase demand, IS shifts to the right and, conversely, when any exogenous variable works to decrease demand, IS shifts to the left

Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. Will there be pressure for the Canadian dollar to change in value against the U.S. dollar as a result of the leftward shift of the U.S. IS curve? A) Yes, the value will appreciate. B) Yes, the value will depreciate. C) No, the value will not change in value. D) Yes, but that pressure will be offset.

Yes, the value will appreciate

What best describes what makes a cooperative fixed exchange rate system work? A) There are too many cooks in the kitchen. B) Take all you can get. C) You scratch my back, I'll scratch yours. D) Curiosity killed the cat.

You scratch my back, I'll scratch yours

Full pass-through means that a 10% rise in the overseas price of an imported good leads to: A) a 100% rise in the domestic price. B) a greater than 10% rise in the domestic price. C) a 10% rise in the domestic price. D) a less than 10% rise in the domestic price.

a 10% rise in the domestic price

The Maastricht Treaty of 1991 provided for all of the following, EXCEPT: A) an enlargement process to include more European nations. B) a ban on nations opting out of a currency union. C) a rename of the EC to the European Union. D) a notion of EU "citizenship."

a ban on nations opting out of a currency union

The Stability and Growth Pact (SGP) of 1997 proposed: A) only a budgetary surveillance process. B) no sanctions for "excessive deficit procedure." C) signing mandatory pledges to uphold the criteria. D) a budgetary surveillance process and sanctions for "excessive deficit procedure."

a budgetary surveillance process and sanctions for "excessive deficit procedure."

A major factor in changing levels of imports in an open economy is: A) real international rates of interest. B) relative international price levels. C) a change in a nation's disposable income. D) a change in transportation costs.

a change in a nation's disposable income

In order to assess the relationship between the real exchange rate and total exports for any nation, one must construct a real effective exchange rate that measures: A) a composite of each trading partner's real exchange rate change weighted by the share of trade. B) the exchange rate that would exist with no inflation and balanced trade. C) the average of all nominal exchange rates since we assume no inflation. D) nominal trade adjusted for inflation.

a composite of each trading partner's real exchange rate change weighted by the share of trade

In a system in which there is an administered exchange rate, what is the term used when the government sets the rate higher to buy fewer units of foreign currency? A) a revaluation B) an appreciation C) a depreciation D) a devaluation

a devaluation

In 2009, there was an unlikely boom in British cross-Channel grocery deliveries to France because of: A) an increase in French income. B) an increase in French preferences for British food items. C) crop failures in France due to a year-long drought. D) a dramatic weakening of the British pound against the euro over the previous 18 months.

a dramatic weakening of the British pound against the euro over the previous 18 months

The effect of an exchange rate system on the price level between countries is that: A) exchange rate volatility causes the prices to converge between countries. B) a fixed exchange rate results in price convergence. C) a fixed exchange rate results in price divergence. D) all member nations of the ERM saw a divergence in prices.

a fixed exchange rate results in price convergence

The Exchange Rate Mechanism (ERM) was: A) an attempt to bring all countries under a fixed exchange rate system. B) a fixed exchange rate system in Europe, with the Deutsche Mark as the anchor currency. C) a fixed exchange rate system in Europe, with the British pound as the anchor currency D) a fixed exchange rate system in use in the 1960s.

a fixed exchange rate system in Europe, with the Deutsche Mark as the anchor currency

The gold standard system was: A) a floating exchange rate system. B) a fixed exchange rate system, in which the country's currency was fixed relative to a pound of gold. C) a fixed exchange rate system, in which the country's currency was fixed relative to an ounce of gold. D) only used by the United States.

a fixed exchange rate system, in which the country's currency was fixed relative to an ounce of gold

A pegged rate system that includes policy cooperation is usually: A) difficult to maintain. B) a good compromise for nations who want exchange rate stability, stable output, and some flexibility. C) not a good bet for nations who are large trading partners. D) administered by large private banks.

a good compromise for nations who want exchange rate stability, stable output, and some flexibility

Shortly after it was established, the Eurozone found that it needed greater power to monitor and enforce discipline upon its members. In particular, which one of the convergence criteria needed closer monitoring? A) no devaluation of a country's exchange rate B) an inflation rate no more than 1.5 percentage points higher than that in the three member countries with the lowest rates of inflation C) a government deficit of no more than 3% of GDP D) a long-term interest rate no more than 2 percentage points higher than in the three member countries with the lowest rates of inflation

a government deficit of no more than 3% of GDP

The decision to form a currency union is similar to the decision to peg; however, the currency union requires: A) a lower level of commitment and therefore requires a lower net benefit. B) a higher level of commitment and therefore requires a higher net benefit. C) more political integration and an agreement to limit trade. D) the loss of political autonomy and is therefore riskier.

a higher level of commitment and therefore requires a higher net benefit

To prevent nations with an inflation bias from entering the Eurozone, the Maastricht criteria for accession include: A) a trial period of joining the Eurozone to see how they fare. B) a three-month period of low interest rates. C) a lengthy trial period of demonstrated commitment to low inflation before joining. D) promises and written commitments to low deficits and debt reduction on entering.

a lengthy trial period of demonstrated commitment to low inflation before joining

Which of the following is the same as a currency union? A) a monetary union B) a currency pact C) a monetary pact D) a monetary area

a monetary union

With expected inflation equal to zero in the model, investment activity for an economy is: A) a positive function of the nominal rate of interest. B) a negative function of the nominal rate of interest. C) constant in the face of differing nominal rates of interest. D) limited to the rate of growth of nominal GDP minus the inflation rate.

a negative function of the nominal rate of interest

The symmetry-integration diagram shows a set of situations under which a nation should fix or float. There is a set of combinations of integration and symmetry beyond which the benefits of fixing outweigh the costs. This is shown as: A) a positively sloped line from the origin, equidistant from both axes. B) a negatively sloped line, above which a nation should fix and below which a nation should float. C) a curved line that follows a random path through the space, coming close but never touching either axis. D) a curved line, the slope of which is at first negative, then increases at an increasing rate as the benefits of fixing increase exponentially

a negatively sloped line, above which a nation should fix and below which a nation should float

The functional relationship between the trade balance and the real exchange rate is: A) a negative, or decreasing, function. B) a positive, or increasing, function. C) a parabolic function. D) impossible to quantify because there are so many unknown variables.

a positive, or increasing, function

Data on the relationship between the U.S. multilateral real exchange rate and the U.S. trade balance show: A) a surprising result that the decrease in the trade balance is correlated with an increase (depreciation) of the U.S. dollar multilateral real exchange rate. B) a predictable result that the increase in the trade balance is correlated with an increase (depreciation) of the U.S. dollar multilateral real exchange rate. C) a correlation that is so weak it cannot be used to support the theory that the trade balance is related to the real effective exchange rate of the U.S. dollar. D) a surprising result that the increase in the U.S. trade balance occurs with a decrease (appreciation) in the real effective exchange rate of the dollar.

a predictable result that the increase in the trade balance is correlated with an increase (depreciation) of the U.S. dollar multilateral real exchange rate

As the world economy grew during the 1920s, the gold standard proved to be: A) a real problem because the quantity of gold could not keep pace with economic expansion, resulting in severe deflation. B) a boon to importers and exporters. C) highly inflationary. D) well-suited to new methods of transferring gold stocks between nations.

a real problem because the quantity of gold could not keep pace with economic expansion, resulting in severe deflation

In a system in which there is an administered exchange rate, what is the term used when the government sets the rate lower to buy more units of foreign currency? A) a revaluation B) an appreciation C) a depreciation D) a devaluation

a revaluation

In addition to government purchases or changes in taxes, demand shocks in the economy can increase or decrease GDP, leading to a fall or rise in the trade balance. Which of the following would NOT represent a demand shock? A) a change in household wealth leading to a rise in consumption expenditures B) a rise in inflation C) a change in the marginal propensity to import, causing imports to rise D) an increase in technology, causing investment spending to rise

a rise in inflation

If output falls, which of the following could be an explanation? A) a fall in the interest rate B) a fall in foreign income or a rise in investments C) a decline in government spending D) a rise in the interest rate, a fall in foreign income, or a decline in government spending

a rise in the interest rate, a fall in foreign income, or a decline in government spending

If the LM curve shifts down, this would be consistent with: A) a rise in the money supply. B) a fall in interest rates. C) a rise in interest rates. D) both a rise in the money supply and a fall in interest rates.

a rise in the money supply

From 1929 to 1935, countries that: A) abandoned the gold standard had higher rates of growth of GDP than countries that continued on the gold standard. B) continued on the gold standard had higher rates of growth of GDP than countries that abandoned the gold standard. C) maintained capital controls had lower rates of growth of GDP than countries that continued on the gold standard. D) removed capital controls had lower rates of growth of GDP than countries that abandoned the gold standard.

abandoned the gold standard had higher rates of growth of GDP than countries that continued on the gold standard

To maintain a pegged rate, a nation faces a trilemma and must also: A) generate extra export revenues. B) watch carefully to ensure imports and exports are equal. C) adjust its interest rates and money supply to ensure the home interest rate is equal to the foreign interest rate to prevent pressure on the exchange rate. D) restrict foreign capital inflows and domestic capital outflows.

adjust its interest rates and money supply to ensure the home interest rate is equal to the foreign interest rate to prevent pressure on the exchange rate

With a flexible exchange rate system, to gain credibility with investors or savers, a nation will often: A) adopt a nominal anchor to keep currency growth in line with a measurable indicator, such as exchange rates or inflation rates. B) limit the power of the central bank by having elected officials set monetary targets. C) give more power to the prime minister to stop inflation and lower unemployment. D) temporarily adopt a gold standard.

adopt a nominal anchor to keep currency growth in line with a measurable indicator, such as exchange rates or inflation rates

When analyzing cooperative fixed exchange rate agreements, there are two forms of cooperation: A) decentralized and center-oriented. B) agreement over interest rates and agreement over exchange rates. C) compromise and democratic methodology. D) idiosyncratic and rules-based.

agreement over interest rates and agreement over exchange rates

Under the gold standard: A) the United States set the price of gold at $35 per ounce, and other countries then established their exchange rates against the U.S. dollar (e.g., £1 = $5). B) Great Britain and the United States set the price of gold at $35 per ounce and £7 per ounce, and then other countries established their exchange rates against either the British pound or the U.S. dollar. C) all countries pegged the values of their currencies to gold. D) only gold was used to settle international transactions.

all countries pegged the values of their currencies to gold

An open peg might be an option for some nations that desire to: A) close off capital inflows and outflows and fix currency rates. B) allow the free flow of capital and fix currency rates. C) allow the free flow of capital with flexible currency rates. D) close off capital inflows and outflows with flexible currency rates.

allow the free flow of capital and fix currency rates

If Britain allows the pound-DM (Deutsche Mark) exchange rate to float, and there is an increase in the foreign interest rate, it: A) has no effect on home rates. B) will cause a monetary contraction and a higher interest rate in Britain. C) will eventually decrease if trade is affected. D) always shifts out the home IS curve (Britain), all else equal.

always shifts out the home IS curve (Britain), all else equal

Which of the following did NOT lead to the collapse of Bretton Woods? A) ample supplies of gold B) collapse of capital controls C) the Vietnam War D) unwillingness to peg to the U.S. dollar

ample supplies of gold

The Maastricht Treaty, signed in 1992, initiated: A) European political integration. B) an economic and monetary union that featured a common currency. C) an alliance of nations who opposed environmental harms from trade. D) an agreement for free flow of labor and other resources across borders.

an economic and monetary union that featured a common currency

In spite of less-than-optimal currency area criteria at present in the Eurozone, some believe that the existence of a working currency union will result in: A) an improvement in the criteria, as the union members are committed to work for more integration. B) a gradual deterioration of the union, as members seek benefits from having an autonomous monetary policy. C) tension and a power struggle over which will be the dominant economy in the union. D) more delay in implementing needed reforms.

an improvement in the criteria, as the union members are committed to work for more integration

Comparing various exchange systems, which system offers a nation the least control over monetary policy? A) flexible exchange rates and a closed economy B) a closed economy C) an open nonpeg D) an open peg

an open peg

If nations are members of a currency union that has certain characteristics to deliver the highest net benefit, the union is known as: A) a floating exchange system. B) an optimum currency area. C) the exchange-rate mechanism. D) an optimum peg.

an optimum currency area

Crowding out occurs because expansionary fiscal policy: A) appreciates the exchange rate. B) lowers foreign income. C) lowers the interest rate. D) increases net exports.

appreciates the exchange rate

Economist Richard Baldwin says the optimism about the Eurozone may be unjustified. His research suggests trade increases in the Eurozone as a result of the currency union: A) are much larger than previous estimates or forecasts and likely to show future gains. B) are much smaller than previous estimates or forecasts and unlikely to show future gains. C) are less stable and subject to wide variations. D) could be much larger if poor and unstable economies were not in the Eurozone.

are much smaller than previous estimates or forecasts and unlikely to show future gains

Political tensions may arise from nations pegging to a center base country's currency if: A) asymmetric shocks cause the home nation to lose the power to stabilize. B) it is determined that the center nation has been misrepresenting the value of its currency. C) financing of military spending becomes more difficult. D) interest rates are affected.

asymmetric shocks cause the home nation to lose the power to stabilize

If a currency union lowers the cost of trade and therefore promotes increased trade, the Euro-optimists believe that: A) a currency union at some point will no longer be necessary. B) at some point the OCA criteria will be satisfied. C) the benefits of having an independent monetary policy will outweigh the benefits from the currency union. D) the currency union may never be beneficial to an individual nation, but it does reduce political tension in large regions.

at some point the OCA criteria will be satisfied

Excessive use of monetary or fiscal policies to achieve stabilization may: A) require the cooperation of firms and the public in order to be effective. B) backfire if the economy becomes destabilized through erratic application. C) never be necessary as long as the economy can rely on automatic stabilizers. D) be better than weaker measures that may not hit the target.

backfire if the economy becomes destabilized through erratic application

Symmetric shocks pose fewer problems for nations linked by fixed exchange rates to a base currency. In general: A) because there are common problems, the economic policy taken by the base currency nation is beneficial for both nations. B) it gives the nation maintaining the peg more autonomy to deal with financial crises. C) the base currency nation can just do nothing, and the issue will resolve itself. D) when there are symmetric shocks, the home nation unlinks its exchange rate from the base currency nation.

because there are common problems, the economic policy taken by the base currency nation is beneficial for both nations

When a nation chooses to fix or float, it should consider: A) only its domestic banks, importers, and exporters. B) only whether it has a great deal of economic integration. C) only whether it has similar circumstances in terms of demand or supply shocks with its trading partners. D) both the level of economic integration and the similarity of demand or supply shocks.

both the level of economic integration and the similarity of demand or supply shocks

Under the gold standard system, if the par exchange rate is $1 = 2 pounds, but the market exchange rate in the United Kingdom is $1 = 1 pound, then a person interested in arbitrage would: A) buy dollars in the United Kingdom to be shipped to the United States and exchanged for a larger quantity of gold. B) find that it is not possible to engage in arbitrage. C) convert dollars into pounds in the United States and sell it for gold in the United Kingdom. D) lose money by trying to exploit any price difference.

buy dollars in the United Kingdom to be shipped to the United States and exchanged for a larger quantity of gold

After the financial crisis of 2008, how did some Eurozone governments finance the bailout of their financial sectors? A) by raising taxes B) by issuing new government bonds, which were purchased by private banks, funded by ECB lending C) by printing more domestic currency to accompany infusions of euros from the ECB D) by selling foreign currency reserves and gold

by issuing new government bonds, which were purchased by private banks, funded by ECB lending

If the central bank expands the money supply under floating exchange rates, it potentially stimulates the economy in two ways, namely: A) by raising the price level and by increased competition. B) by lowering the rate of interest and by causing a depreciation of the currency. C) by creating higher spending and by increasing the budget deficit. D) by increasing worker productivity and creating R&D incentives for firms.

by lowering the rate of interest and by causing a depreciation of the currency

The convergence criteria included that a country: A) should maintain a deficit of 6% of GDP. B) can have a debt level equal to 80% of GDP. C) can have a debt level equal to 60% of GDP. D) should maintain a deficit lower than 1% of GDP.

can have a debt level equal to 60% of GDP

Traders in nations abiding by rules of Bretton Woods found ways to avert restrictions on _______ by offshore banking and improper accounting reporting. A) imports B) capital controls C) gold movements D) interest rate changes

capital controls

Suppose that Canada pegs its currency to the U.S. dollar at a rate of $C1 = $US1 and that Canada is a major exporter of crude oil to the United States. The increase in the price of oil that occurred in the second half of 2007 is likely to: A) cause Canada to adopt a contractionary monetary policy and the United States to adopt an expansionary monetary policy. B) cause Canada to adopt an expansionary monetary policy and the United States to adopt a contractionary monetary policy. C) cause both Canada and the United States to adopt contractionary monetary policies. D) cause both Canada and the United States to adopt expansionary monetary policies.

cause Canada to adopt a contractionary monetary policy and the United States to adopt an expansionary monetary policy

Suppose that Canada pegs its dollar to the U.S. dollar at a rate of $C1 = $US1 and that Canada is a major exporter of crude oil to the United States. The increase in the price of oil that occurred in the second half of 2007 is likely to: A) cause asymmetric shocks to the U.S. and Canadian economies that will make it difficult for Canada to maintain the $C1 = $US1 exchange rate. B) cause symmetric shocks to the U.S. and Canadian economies that will make it difficult for Canada to maintain the $C1 = $US1 exchange rate. C) cause asymmetric shocks to the U.S. and Canadian economies and make it easier for Canada to maintain the $C1 = $US1 exchange rate. D) cause symmetric shocks to the U.S. and Canadian economies and make it difficult for Canada to maintain the $C1 = $US1 exchange rate.

cause asymmetric shocks to the U.S. and Canadian economies that will make it difficult for Canada to maintain the $C1 = $US1 exchange rate

If China has domestic assets of $50 billion, domestic liabilities of $100 billion, and $50 billion in foreign assets, a 10% appreciation of the Chinese yuan will: A) cause the Chinese domestic assets to increase in value. B) cause the Chinese domestic liabilities to decrease in value. C) cause the overall wealth to decrease by 5%. D) cause the overall wealth to increase by 5%.

cause the overall wealth to decrease by 5%

A cooperative outcome in a situation where one nation pegs to another would be that the: A) center country abandons its own stabilization policy in favor of the home country. B) home country absorbs the losses resulting from the stabilization policy in the center country. C) center country makes concessions, recognizing the impact on the home country, thereby sharing the pain. D) peg is temporarily abandoned.

center country makes concessions, recognizing the impact on the home country, thereby sharing the pain

If a nation trades with another nation in a foreign currency (such as some commodities sold that are priced in U.S. dollars), then, when nominal exchange rates change, the real effective exchange rate will: A) change by more. B) change by less. C) change in exactly the same proportion. D) not change at all.

change by less

It can be shown using the IS-LM-FX model that a temporary expansion in the supply of money is effective in: A) raising rates of interest. B) raising the rate of unemployment. C) combating temporary downturns in the economy. D) increasing consumer confidence.

combating temporary downturns in the economy

Every point on an open-economy IS curve represents: A) combinations of interest rates and the supply of money, which result in equilibrium in the money market. B) combinations of interest rates and levels of production, which result in equilibrium in the goods market. C) combinations of interest rates and levels of production, which result in equilibrium in the money market, the goods market, and the forex market. D) combinations of interest rates and levels of production, which result in equilibrium in the goods market and the forex market.

combinations of interest rates and levels of production, which result in equilibrium in the goods market and the forex market

The net benefits of entering into an OCA are calculated by: A) measuring the symmetry between the political structures of the nations. B) measuring the variability of exchange rates between the nations. C) comparing the efficiency benefits of market integration versus the costs of abandoning discretionary monetary policy. D) comparing the trade balances between the nations with growth in GDP for each nation.

comparing the efficiency benefits of market integration versus the costs of abandoning discretionary monetary policy

A variety of indicators such as goods and labor market integration, differing unemployment rates, and the lack of fiscal federalism have prompted most economists to: A) herald the success of the Eurozone. B) conclude that the Eurozone has performed better than the United States in nearly every category. C) conclude that the Eurozone has not been (and is not now) an optimal currency area going back to the 1990s. D) recommend changes to the new currency to make it more responsive to demand shocks.

conclude that the Eurozone has not been (and is not now) an optimal currency area going back to the 1990s

When a country has monetary autonomy, it can: A) conduct monetary policy independently of all other countries. B) conduct monetary policy only in coordination with all other countries. C) conduct monetary policy only in cooperation with its reserve currency country (the country to which it fixes its currency). D) print money without affecting inflation.

conduct monetary policy independently of all other countries

The Stability and Growth Pact (SGP) was a failure because of all of the following reasons, EXCEPT: A) surveillance failure. B) weak punishment. C) once countries joined the Eurozone, enforcement of rules was impossible. D) consultations between the Federal Reserve and the ECB broke down.

consultations between the Federal Reserve and the ECB broke down

The trade balance component of aggregate demand is a function of all the following, EXCEPT: A) foreign disposable income. B) domestic disposable income. C) the real exchange rate. D) consumer spending.

consumer spending

If the marginal propensity to consume for a nation is 0.8, it means: A) consumers save 80% of their incomes. B) consumers spend 80% of their incomes. C) consumers pay 20% tax on their earnings. D) consumers decrease their spending by $0.80 for each $1 of a decrease in their income.

consumers decrease their spending by $0.80 for each $1 of a decrease in their income

Suppose that the United Kingdom pegs the pound to the euro and the European Central Bank decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. Would it expand, contract, or not change the European money supply? A) expand B) contract C) not change D) The answer cannot be determined using the information provided.

contract

When a nation is economically integrated with trading partners, fixed exchange rates: A) would be very harmful to the dynamic nature of trade. B) could promote integration and economic efficiency by keeping transaction costs low. C) would be the best choice if that nation became the dominant nation in the transactions. D) would be adequate but have the disadvantage of discouraging trade because of uncertainty.

could promote integration and economic efficiency by keeping transaction costs low

Suppose that country A pegs its currency to that of country B. Now suppose that there is an adverse demand shock in country A. Country B is more likely to cooperate and increase its money supply in response to country A's adverse demand shock when: A) country B's output is below its preferred level. B) country B is experiencing high rates of inflation. C) country B wants country A to devalue its currency. D) country A is experiencing high rates of inflation.

country B's output is below its preferred level

Whenever U.S. government spending increases, thereby increasing the demand for real balances and the rate of interest, the currency will appreciate and there is a potential for: A) overshooting. B) crowding out. C) a Republican backlash. D) recession.

crowding out

The Eurozone is an example of a: A) common market. B) currency area. C) free-trade area. D) customs union.

currency area

The recognition that _____ plays a profound role in many developing nations has led to more attention to this factor when choosing an exchange rate regime. A) poverty B) illiteracy C) currency mismatch due to liability dollarization D) government corruption

currency mismatch due to liability dollarization

Seventeen European countries use the euro as their common currency. This arrangement is best described as a: A) currency union. B) free trade area. C) common market. D) monetary union.

currency union

Which of the following is the LEAST common? A) free trade areas B) currency unions C) currency crises D) nominal anchors

currency unions

To satisfy the admission criteria to the European Union, a country must meet all of the following, EXCEPT: A) maintain an inflation that is equal to the average of the three lowest rates. B) maintain long-term interest rates equal to that of the three countries with the lowest inflation rates. C) maintain a pegged exchange rate, without any revision for two years. D) cut down taxes to the lowest possible level.

cut down taxes to the lowest possible level

When the real exchange rate decreases in the United States, then there is a(n) ______ in U.S. demand for U.S. goods and a(n) _________ in U.S. demand for Mexican goods. A) decrease; increase B) increase; decrease C) increase; increase D) decrease; decrease

decrease; increase

Consider an economy with flexible exchange rates. If there are high levels of inflation in the economy, then the appropriate monetary policy would be to ________ the money supply, which will cause the ______ curve to shift ________. A) increase; the LM; left B) decrease; the LM; right C) decrease; the LM; left D) increase; the IS; left

decrease; the LM; left

Suppose that country A pegs its currency to the currency of country B. Which of the following will NOT be a benefit of this arrangement to country A? A) lower transactions costs for A to conduct international trade with country B B) increased capital flows between the two countries because of increased certainty of future exchange rates C) decreased migration between the two countries because of increased certainty of future exchange rates D) lower costs of economic transactions costs between the two countries, leading to welfare gains for country A

decreased migration between the two countries because of increased certainty of future exchange rates

When a fixed exchange rate system is adopted, it results in all of the following except: A) reduced uncertainty about exchange rate. B) decreased volatility in prices. C) increased volume of trade. D) decreased volume of trade.

decreased volume of trade

What is the ECB prohibited from doing in the Eurozone? A) raising tariffs on goods from nonmember countries B) directly financing member countries fiscal deficits C) increasing interest rates D) decreasing interest rates

directly financing member countries fiscal deficits

Adopting a fixed exchange rate promotes trade if the regime is: A) semi-floating. B) indirectly pegged. C) directly floating. D) directly pegged.

directly pegged

Which of the policies of the U.S. Federal Reserve would most closely match the monetary policy most often used by the ECB? A) open-market operations B) discount policy C) margin requirements D) reserve requirements changes

discount policy

The MPC shows the relationship between: A) interest rates and investment. B) disposable income and consumer spending. C) saving and investing. D) inflation and unemployment.

disposable income and consumer spending

The final market price of imports may not reflect 100% of changes in the real effective exchange rate because: A) exchange rates in many nations are fixed. B) there are restrictions on capital inflows. C) domestic price distortions, such as markups or taxes, reduce the impact of the exchange rate change. D) the government has instituted price controls.

domestic price distortions, such as markups or taxes, reduce the impact of the exchange rate change

A fall in the real exchange rate (appreciation) will decrease the trade balance in the short run and cause a(n) ________ of the total demand curve. A) downward shift B) increase in the slope C) upward shift D) decrease in the slope

downward shift

Adopting a common currency implies all of the following, EXCEPT that: A) each region will lose its monetary autonomy. B) a common interest rate will be set. C) each region will retain its monetary authority. D) a common monetary policy will be set by the central bank.

each region will retain its monetary authority

In a fixed exchange rate system, the center country, to whose currency the other countries peg their exchange rate, will: A) find it difficult to conduct autonomous monetary policy. B) find it difficult to conduct autonomous fiscal policy. C) easily implement monetary and fiscal policy to suit its economy. D) defer to advice from other countries in conducting its domestic policy.

easily implement monetary and fiscal policy to suit its economy

Exiting from a peg is relatively ____ compared with exiting from a common currency, which would be ____. A) difficult; impossible B) easy; more difficult and costly C) complex; simple D) rare; much more common

easy; more difficult and costly

The idea that nations in a currency union will have fewer trade barriers or other frictions may have the dual effect of: A) increased integration and more risk of debt default. B) increased political harmony and less risk of asymmetric shocks. C) economies of scale and specialization as well as higher risk of asymmetric shocks. D) economic growth and an increase in environmental degradation

economies of scale and specialization as well as higher risk of asymmetric shocks

A fixed exchange rate causes: A) transaction costs to increase. B) efficiency to increase only if the economies are integrated. C) efficiency to increase under all circumstances. D) volume of trade to decline.

efficiency to increase only if the economies are integrated

The new European Economic Community, after it changed its name to the European Communities, tackled two issues related to: A) enlargement (expansion) of the European Communities and economic integration between members. B) immigration and terrorism. C) secret Nazi cells and latent communism. D) unemployment and inflation.

enlargement (expansion) of the European Communities and economic integration between members

Because a change in consumer spending is positively related to a change in income, the slope of the aggregate demand function is: A) 0. B) 1. C) equal to the MPC. D) equal to the marginal propensity to save.

equal to the MPC

At a given nominal rate of interest, when spending is equal to output and there is uncovered interest parity, we have: A) real exchange rate parity. B) equilibrium in the goods market and in the forex market. C) stable inflation and low unemployment. D) depreciation of the home currency.

equilibrium in the goods market and in the forex market

Factors that shift the IS curve involve: A) interest rates and levels of GDP. B) the quantity of money and the demand for money. C) the trade balance. D) exogenous variables affecting demand, such as a change in government spending or a change in the exchange rate.

exogenous variables affecting demand, such as a change in government spending or a change in the exchange rate

Under uncovered interest parity, if the domestic interest rate is greater than the foreign interest rate, then exchange rates are: A) expected to rise. B) expected to stay constant. C) expected to fall. D) uncertain.

expected to rise

If the dollar appreciates against the Mexican peso, consumers in Mexico are likely to buy more local products, and consumers in the United States are likely to buy more Mexican products. This phenomenon is known as: A) forward exchange rates. B) currency pass through. C) expenditure switching. D) depreciation of the dollar.

expenditure switching

A result of an exchange rate depreciation, _____ would occur as the spending patterns change in response to a change in the exchange rate. A) expenditure switching from domestic to foreign products B) expenditure switching from foreign to domestic products C) expenditure switching from rural to urban producers D) terms-of-trade deterioration

expenditure switching from foreign to domestic products

Lower transaction costs are a benefit of fixed exchange rates. Therefore, relative prices in two trading nations linked by fixed exchange rates should: A) experience more price divergence. B) experience more price convergence. C) have less arbitrage and more speculation. D) have lower costs of production.

experience more price convergence

If taxes go up and all else remains equal, then consumption should: A) rise by more than the tax increase. B) rise by the same amount as the tax increase. C) rise by less than the tax increase. D) fall.

fall

An increase in the home country's income will result in a(n) _____ in the home country trade balance, and an increase in foreign income will result in a(n) _____ in the home country trade balance. A) fall; fall B) increase; increase C) increase; fall D) fall; increase

fall; increase

As economic similarity rises, the stability costs of a common currency decrease because there are: A) more asymmetric shocks. B) fewer asymmetric shocks. C) no asymmetric shocks. D) no symmetric shocks.

fewer asymmetric shocks

The ECB has the following mandates, EXCEPT: A) use interest rates to implement the policy of price stability. B) use monetary policy to fulfill objectives of the European Union community. C) not be under the jurisdiction of any other European Union institution. D) finance deficits of member countries when needed.

finance deficits of member countries when needed

Trilemma refers to policy conflicts among: A) fixed exchange rate, monetary autonomy, and free capital mobility goals. B) floating exchange rate, monetary autonomy, and free capital mobility goals. C) fixed exchange rate, monetary autonomy, and floating exchange rate goals. D) floating exchange rate, fiscal autonomy, and monetary autonomy goals.

fixed exchange rate, monetary autonomy, and free capital mobility goals

Research in the performance of developing nations with exchange rate pegs has shown that: A) fixed exchange rates are 100% effective in curbing inflation and preventing hyperinflation. B) fixed exchange rates are 100% ineffective in curbing inflation and preventing hyperinflation. C) floating exchange rates are more effective in curbing inflation and preventing hyperinflation. D) fixed exchange rates are neither necessary nor sufficient to curb inflation and prevent hyperinflation.

fixed exchange rates are neither necessary nor sufficient to curb inflation and prevent hyperinflation

The basics of the ERM in the EC provided for: A) flexible exchange rates and free capital flows. B) fixed exchange rates based on the U.S. dollar. C) gradual conversion to a common currency (the euro). D) fixed exchange rates based on a weighted basket of currencies formula.

fixed exchange rates based on a weighted basket of currencies formula

Studies cited in the text indicate that prices in countries with _______ exchange rate systems tend to __________more rapidly than prices in countries with ________ exchange rate systems. A) fixed; diverge; floating B) floating; converge; fixed C) fixed; converge; floating D) fixed; rise; floating

fixed; converge; floating

Beginning in the early 1970s, many nations abandoned their dollar standard and moved toward a system of: A) fixed exchange rates based on gold. B) fixed exchange rates based on the Deutsche Mark. C) floating exchange rates. D) real money systems in which currencies were backed by government bonds.

floating exchange rates

In nations that cannot borrow in their own currencies, which exchange rate system is more destabilizing and less useful in terms of stabilizing GDP? A) floating exchange rates B) fixed exchange rates C) banded exchange rates D) open pegs

floating exchange rates

In the 1930s, some nations such as the United States and Britain abandoned their gold pegs by adopting ________, whereas other nations such as Germany and South American nations adopted ________. A) floating exchange rates and open capital markets; fixed exchange rates and capital controls B) fixed exchange rates and open capital markets; floating exchange rates without capital controls C) fixed exchange rates and closed capital markets; floating exchange rates and closed capital markets D) floating exchange rates with closed capital markets; floating exchange rates and open capital markets

floating exchange rates and open capital markets; fixed exchange rates and capital controls

The J curve effect in reference to the trade balance may persist: A) for up to one year after the depreciation. B) permanently. C) for a few weeks only. D) for up to 10 years after the depreciation.

for up to one year after the depreciation

To simplify the analysis of demand shocks in an open, two-economy, short-run model, we assume all of the following, EXCEPT: A) fixed prices and wages. B) levels of government spending and taxes; foreign GDP and foreign rates of interest are given. C) no net unilateral transfers or foreign factor income. D) foreign GDP and foreign rates of interest are constant.

foreign GDP and foreign rates of interest are constant

In 1999, the Eurozone was: A) formed by all European countries to reduce tariffs. B) formed by 11 countries to adopt a new currency. C) formed by 21 countries to allow labor migration between countries. D) renamed the World Trade Organization.

formed by 11 countries to adopt a new currency

The gold standard dominated exchange rate systems during what period? A) from 1776 to 1816 B) from 1836 to 1849 C) from 1870 to 1913 D) from 1945 to 1965

from 1870 to 1913

During which period in history were the largest number of nations using the gold standard as their payments system? A) from 1870 to 1913 B) from the end of WWI to 1929 C) from 1929 to 1939 D) from 1945 to 1975

from the end of WWI to 1929

The Single European Act passed in 1987 sought to: A) bring former communist nations into the EC. B) further integrate the European economies to promote trade and economic growth. C) establish the European nations as sovereign nations with no political ties to the center. D) impose stiff penalties for violating the exchange rate parities set in the ERM.

further integrate the European economies to promote trade and economic growth

If there is a greater degree of economic similarity between the home nation and the base currency nation, the economic stabilization benefit of pegged exchange rates: A) gets smaller. B) becomes more equal. C) gets larger. D) disappears.

gets larger

Under a gold standard, as trade takes place and the foreign exchange market is affected, ______ tend(s) to restore equilibrium. A) a change in the interest rate B) gold flows between nations C) currency flows D) changes in the value of gold

gold flows between nations

Under a gold standard, as trade takes place, the importing nation experiences a ________ and a(n) _________ in its money supply, while the exporting nation experiences the opposite. A) gold outflow; contraction B) gold inflow; expansion C) gold outflow; expansion D) gold inflow; contraction

gold outflow; contraction

Traditionally, nations pegged their currencies to _______, and so trade was accomplished with _______ exchange rates. A) the pound sterling; floating B) gold; fixed C) the U.S. dollar; floating D) silver; fixed

gold; fixed

Economic integration refers to the growth of market linkages in: A) goods only. B) labor. C) capital and labor only. D) goods, capital, and labor.

goods, capital, and labor

The greater the MPC is, the ______ the slope of the demand curve. A) greater B) smaller C) It depends on the trade balance. D) The slope of the demand curve does not depend on this.

greater

In comparing the European Union and the United States as OCAs, the authors of the text conclude that there is(are): A) greater integration of goods markets and greater labor mobility in the United States than in Europe, but about the same symmetry of shocks in the two regions. B) greater integration of goods markets, greater labor mobility, and greater symmetry of shocks in the United States than in Europe. C) less integration of goods markets, but greater labor mobility and greater symmetry of shocks in the United States than in Europe. D) greater integration of goods markets, greater labor mobility, and greater symmetry of shocks in Europe than in the United States.

greater integration of goods markets and greater labor mobility in the United States than in Europe, but about the same symmetry of shocks in the two regions

Euro-optimists are convinced that with OCA criteria as guiding principles: A) Eurozone members will never again be caught in the trap of fiscal irresponsibility. B) the euro will strengthen against other world currencies to the extent that even occasional debt issues will not affect it. C) greater market integration will bring about labor and capital mobility and increased trade that will serve to strengthen the Eurozone. D) the ECB will be able to loosen its stranglehold and provide sufficient liquidity for the Eurozone economies to thrive.

greater market integration will bring about labor and capital mobility and increased trade that will serve to strengthen the Eurozone

An advantage to a developing nation of fixed exchange rates is that it's: A) easier for the central bank to print money to finance its deficit. B) harder for the central bank to print money to finance its deficit. C) easier to conduct fiscal policy. D) harder for the government to raise taxes.

harder for the central bank to print money to finance its deficit

A departure from the New Zealand model, in which the central bank implements an inflation target set by the government, the ECB operates according to the German model, in which the central bank: A) has ceded power to the administration. B) has authority to set and implement the inflation target. C) functions only in a technical sense. D) is replaced by a currency board.

has authority to set and implement the inflation target

When analyzing the effects of changes in demand in an open economy, we assume that firms: A) have only one fixed rate of return on various projects when deciding investment activity. B) have differing returns on various projects when deciding investment activity. C) are required to borrow only from domestic banks when funding investment activity. D) consider the effects of inflation on investment activity.

have differing returns on various projects when deciding investment activity

Traders operate on the principle that the ______ the value of the nominal exchange rate (E), the ______ it is to purchase foreign currency, and the _____ its return measured in the domestic currency. A) higher; more expensive; lower B) higher; less expensive; higher C) lower; more expensive; higher D) higher; more expensive; higher

higher; more expensive; lower

In comparison with a floating exchange rate, the effect on the volume of trade in a fixed exchange rate is: A) highest under an indirect peg. B) lowest for currency unions. C) highest for currency unions. D) higher for an indirect peg than a direct peg.

highest for currency unions

A noncooperative outcome after the center nation has undertaken a stabilization policy in response to an asymmetric shock would be that the: A) center country abandons its own stabilization policy in favor of the home country. B) home country absorbs the losses resulting from the stabilization policy in the center country. C) center country makes concessions, recognizing the impact on the home country and thereby sharing the pain. D) peg is temporarily abandoned.

home country absorbs the losses resulting from the stabilization policy in the center country

Criteria used to predict the benefits of fixed exchange rates can be applied to benefits from an optimum currency union. Generally, benefits are higher whenever the: A) home country has balanced trade with its union partners. B) home country's economy is dissimilar to that of its union partners. C) home country's economy is similar to that of its union partners and it suffers similar types of economic "shocks." D) home country has large and growing trade imbalances with its union partners.

home country's economy is similar to that of its union partners and it suffers similar types of economic "shocks."

Although Denmark currently pegs its krona to the euro successfully, it has not joined the currency union. All of the following are reasons, EXCEPT: A) with a peg, the Danish monetary authority has the option to exercise control over the exchange rate in the future if needed. B) Denmark has an additional option to abandon its peg to the euro if required to maintain stability. C) Denmark has the option to conduct monetary policy if it chooses. D) if Denmark gave up its krona and adopted the euro, it could always easily go back to the krona if needed to preserve monetary autonomy.

if Denmark gave up its krona and adopted the euro, it could always easily go back to the krona if needed to preserve monetary autonomy

When analyzing the impact of government consumption and taxes in an open economy, we exclude transfer payments because: A) they are not paid for by taxes. B) in the aggregate, they do not generate a change in total spending on goods and services. C) the sums are so large as to be incalculable. D) the sums are so small as to be insignificant.

in the aggregate, they do not generate a change in total spending on goods and services

A Keynesian model is one in which prices are sticky: A) in the short run only. B) in the short run and in the long run. C) in the long run only. D) so that they never depend on the money supply.

in the short run only

All else equal, an increase in the base country's interest rate should cause a(n) ____ in the interest rate of a country that fixes its exchange rate to the base country. A) decline B) negligible impact C) increase D) change in the exchange rate regime

increase

If net external wealth increases for firms, it could ____ their ability to borrow and expand. A) cut off completely B) increase C) decrease D) have no effect

increase

The relationship between the quantity of real balances demanded and the rate of interest (called the demand for money curve) will ____ when GDP increases because _____. A) increase (shift right); more transactions balances are needed to make purchases and to hold between pay periods B) increase (shift right); more asset balances are needed for saving or precautionary reasons C) decrease (shift left); fewer transactions balances are needed to make purchases and to hold between pay periods D) decrease (shift left); lower asset balances are needed for saving or precautionary reasons

increase (shift right); more transactions balances are needed to make purchases and to hold between pay periods

Which of the following events is least likely to take place under a fixed exchange rate system? A) an increased volume of trade because of a decline in exchange rate volatility B) increased cross-border capital flows C) increase in cost of trade because of higher transaction costs D) increased cross-border labor flows in integrated economies

increase in cost of trade because of higher transaction costs

If the marginal propensity to consume foreign imports (MPC F ) is equal to 0.15, then a(n): A) increase in domestic consumption will generate a 15% rise in imports. B) decrease in domestic consumption will generate a 15% rise in imports. C) increase in domestic income will generate a 15% rise in imports. D) decrease in domestic income will generate a 15% rise in imports.

increase in domestic income will generate a 15% rise in imports

An increase in income in an open economy nation will cause a change in consumer spending on home production, and a(n): A) increase in taxes. B) decrease in savings. C) increase in foreign production. D) increase in imports if MPC F (marginal propensity to consume foreign goods) is greater than zero.

increase in imports if MPC F (marginal propensity to consume foreign goods) is greater than zero

The LM curve will shift to the right, if there is a(n): A) decrease in money supply. B) increase in real money demand. C) increase in money supply. D) increase in output.

increase in money supply

If Mexico has foreign assets worth $100 billion and no liabilities, a 15% depreciation of the peso will result in a(n): A) increase in liabilities at home by 100 billion pesos. B) decrease in assets at home by 150 billion pesos. C) decrease in overall wealth by 15%. D) increase in overall wealth.

increase in overall wealth

A shift to the left by the IS curve can be achieved by all of the following, EXCEPT a(n): A) decrease in government spending. B) increase in taxes. C) increase in the foreign interest rate. D) increase in the domestic price level.

increase in the foreign interest rate

The best estimate of the effect of the euro on trade, according to Richard Baldwin, is a(n): A) increase of 9%. B) increase of 235%. C) fall of 9%. D) fall of 7%.

increase of 9%

The larger the percentage of U.S. imports already priced in dollars, the less likely depreciation in the U.S. dollar will be to: A) decrease prices of imports. B) increase prices of imports. C) limit trade imbalances. D) increase trade with third-party nations

increase prices of imports

The authors of your textbook cite one study that estimated that currency unions ________ trade among member countries by approximately ______. A) increase; 100% B) increase; 40% C) decrease; 100% D) decrease; 40%

increase; 40%

Economists studying the impact of direct pegs on trade found that direct pegs: A) increased levels of trade by 21%. B) increased levels of trade by 44%. C) increased levels of trade by 58%. D) had no effect on trade levels.

increased levels of trade by 21%

Economists studying the impact of currency unions on trade found currency unions: A) increased levels of trade by 221%. B) increased levels of trade by 104%. C) increased levels of trade by 38%. D) had no effect on trade levels.

increased levels of trade by 38%

A recent study found that currency unions _____ bilateral trade by _____ compared with floating regimes. A) increased; 90% B) increased; 38% C) decreased; 10% D) decreased; 50%

increased; 38%

During the Great Recession, the Polish economy withstood the economic impact by: A) decreasing the money supply. B) increasing the taxes. C) increasing the money supply. D) appreciating its currency.

increasing the money supply

The ECB, like the U.S. Federal Reserve, is ______, and unlike the U.S. Federal Reserve, is not ______. A) independent; a lender of last resort B) subject to scrutiny by the legislature; able to lend to large corporations C) dependent on congressional approval for its policies; committed to price stability D) able to lend to member governments; able to lend directly to banks

independent; a lender of last resort

Suppose that Mexico and Canada both peg their currencies to the U.S. dollar. The relationship between the Mexican peso and the Canadian dollar is best described as a(n): A) indirect peg. B) fixed exchange rate system. C) currency union. D) free trade area.

indirect peg

Having a nominal inflation target for monetary growth can pose a difficulty because: A) inflation is very challenging to measure. B) inflation can be higher or lower, depending on the growth rate of real GDP. C) most agree that inflation targets are completely unrelated to monetary growth. D) monetary growth can be affected by political pressure and other noneconomic factors.

inflation can be higher or lower, depending on the growth rate of real GDP

The rules for joining the Eurozone specified monetary economic conditions that the potential entrants had to achieve for admission. The convergence criteria of the ECB were: A) moderate inflation, low unemployment, and adequate foreign currency reserves. B) no national debt and no current account deficits within the past five years. C) inflation rates roughly matching the lowest in the Eurozone, stable exchange rate peg for two years, and equivalent long-term interest rates. D) a stable political situation, high GDP growth rate, and moderate unemployment.

inflation rates roughly matching the lowest in the Eurozone, stable exchange rate peg for two years, and equivalent long-term interest rates

The ECB has favored using ______ as a target for implementing monetary policy. A) money supply B) inflation targets C) unemployment figures D) fiscal deficits

inflation targets

In economics, another term for seigniorage is: A) inflation tax. B) royalty. C) high inflation. D) government borrowing.

inflation tax

The devaluation of a currency results in a(n): A) initial increase in trade balance, but an eventual decline in the trade balance. B) permanent decline in the trade balance. C) permanent increase in the trade balance. D) initial decrease in trade balance, but an eventual increase in the trade balance.

initial decrease in trade balance, but an eventual increase in the trade balance

After identifying one combination of interest rates and GDP for which the demand for money is equal to the supply of money (equilibrium), to maintain the equilibrium if GDP rises: A) this would not affect interest rates. B) interest rates would have to fall. C) interest rates would have to rise. D) interest rates would not be in parity with foreign rates of interest.

interest rates would have to rise

Even though it may seem that nations have a wide variety of policy options to stabilize their economies, there are a number of issues to be considered and overcome. Which of the following is NOT an issue confronting policy makers? A) the desire to maintain fixed exchange rates or membership in a pegged currency bloc B) long and uncertain time lags when policy effects will occur C) the pass-through issue, when little effect occurs on the real effective exchange rate D) international controls that limit the ability of any nation to determine its exchange rate policy

international controls that limit the ability of any nation to determine its exchange rate policy

The theory of an OCA sets out benefits to be derived from increased trade. A comparison of the U.S. currency area with that of the Eurozone reveals that: A) interstate and inter-region trade is roughly equal in both areas. B) interstate and inter-region trade in the United States is smaller as a percent of gross state product than the same figure for Europe. C) interstate and inter-region trade in the United States is much larger as a percent of gross state product than the same figure for Europe. D) trade comparisons are largely irrelevant to the success of a currency union.

interstate and inter-region trade in the United States is much larger as a percent of gross state product than the same figure for Europe

The quantity of real balances demanded varies ____ with the nominal rate of interest because ________. A) directly; at higher interest rates people want more money B) inversely; at lower interest rates people want less money C) inversely; when people hold more money, they forego interest on other assets D) directly; real balances are independent of inflation and would not be affected by it

inversely; when people hold more money, they forego interest on other assets

A belief that high-tech companies would be highly profitable led to the boom in Internet companies in the 1990s, which is known as a(n): A) investment shock. B) investment boom. C) technology surge. D) technology reversal.

investment shock

. In fact, several studies focused on Europe concluded that higher exchange rate volatility: A) is associated with smaller price differentials. B) is associated with larger price differentials. C) often precedes a return to stability. D) promotes trade and cooperation among nations.

is associated with larger price differentials

A 2013 article in the Financial Times predicted that the post-2008 Eurozone debt crisis: A) is over and the benefits from the ordeal are valuable lessons about fiscal responsibility. B) is capable of solution but far from over. The article blames the private financial sector and denies that fiscal irresponsibility is the sole cause. C) is a bellwether of the decline and eventual collapse of the euro. D) teaches us that fiscal restraint is much more important than economic performance or unemployment issues.

is capable of solution but far from over. The article blames the private financial sector and denies that fiscal irresponsibility is the sole cause

Developing countries have been able to reduce the effect of depreciation on the value of their debt by: A) issuing debt in U.S. dollars. B) issuing debt in domestic currency. C) appreciating their currency. D) using expansionary fiscal policy.

issuing debt in domestic currency

The ECB would be unable to prevent a large banking crisis in the Eurozone because: A) it can print money but is prohibited from lending to banks or central banks in the member states. B) crises of such proportions would require an international effort. C) deposits in banks in the Eurozone have FDIC insurance and are therefore out of the control of the ECB. D) its assets are inadequate.

it can print money but is prohibited from lending to banks or central banks in the member states

A country is using a beggar-thy-neighbor policy whenever: A) it uses contractionary monetary policy to attract capital inflows from other countries. B) it devalues its currency to improve its macroeconomic position at the expense of its trading partners. C) it revalues its currency to improve its macroeconomic position and that of its trading partners. D) it cooperates with other countries in establishing its monetary policy.

it devalues its currency to improve its macroeconomic position at the expense of its trading partners

Euro-pessimists believe that the Eurozone has been unsuccessful because: A) it has had little effect on already high intra-European trade. B) the euro is becoming a reserve currency for foreign central banks. C) European inflation has fallen to 10% annually. D) there are no exit mechanisms for countries to leave the Eurozone.

it has had little effect on already high intra-European trade

A significant bank crisis in one Eurozone country is a problem for the ECB because: A) it will violate its money supply growth rule if it tries to provide liquidity to that country's banks. B) it has no mandate to be a lender of last resort to financial institutions in the Eurozone. C) it has no ability to affect the money supply in Eurozone countries. D) its consensus decision-making process may prompt too rapid a reaction to a crisis in one country.

it has no mandate to be a lender of last resort to financial institutions in the Eurozone

Controversy over the ECB includes all of the following, EXCEPT: A) its poor performance in controlling euro inflation. B) its lack of accountability for its actions. C) its remoteness from democratic control. D) the perception that the central bank does not focus on problems related to European economic performance.

its poor performance in controlling euro inflation

An optimum currency union refers to the decision by a country to: A) join a monetary union that best serves its self-interest. B) join a free trade area. C) dollarize its economy. D) eliminate tariffs.

join a monetary union that best serves its self-interest

The economic costs of forming a currency union will be lower whenever: A) labor market integration is lower. B) labor market integration is higher. C) labor markets are not integrated. D) wage rigidities are present.

labor market integration is higher

The European Union labor markets are different from that of the United States in that: A) language adds a barrier to free movement of labor in the European Union. B) there is less labor regulation in the European Union. C) persistent unemployment exists in member countries in the European Union. D) language adds a barrier to free movement of labor in the European Union and persistent unemployment exists in member countries in the European Union.

language adds a barrier to free movement of labor in the European Union and persistent unemployment exists in member countries in the European Union

Prior to 2008, some Eurozone nations were______; others were ______, which resulted in ______. A) large external debtors; large external creditors; a credit-fueled boom B) irresponsible; trying to pick up the slack; lackluster overall performance C) inflation hawks; inflation biased; overall mild inflation D) worried the ECB was not minding the situation; not worried at all; some nations exiting the Eurozone

large external debtors; large external creditors; a credit-fueled boom

If economic costs outweigh benefits from joining a currency union, a nation may still choose to join because of: A) political pressure from the large nations. B) large political benefits. C) the fear of floating. D) the ability to limit imports.

large political benefits

Research shows that when exchange rates are more volatile, the price differentials are ____ and the convergence is _____. A) smaller; faster B) smaller; slower C) larger; slower D) larger; faster

larger; slower

When exchange rates are fixed, a temporary expansion in the money supply will: A) increase output. B) leave output unchanged. C) lower output. D) increase the exchange rate.

leave output unchanged

. If a currency union provides more to its members than a common currency unit, such as fiscal transfers or fiscal federalism, it would make joining that union: A) less costly. B) more beneficial. C) yield higher net benefits. D) less costly, more beneficial, and yield higher net benefits.

less costly, more beneficial, and yield higher net benefits

If a proportion of traded goods (such as oil) are priced in a foreign currency, the real exchange rate becomes: A) lower. B) higher. C) less responsive to changes in the nominal exchange rate. D) more responsive to changes in the nominal exchange rate.

less responsive to changes in the nominal exchange rate

In the Eurozone, labor market integration (including labor mobility) between member nations is: A) far ahead of the United States. B) on par with the United States. C) less than in the United States. D) structured differently because in the Eurozone workers have better benefits.

less than in the United States

A nation whose labor market is highly integrated with other nations in a currency union is more ______ to join because ______. A) unlikely; workers would suffer real wage declines if they have competition from foreign workers B) unlikely; firms would find it expensive to hire workers if they have to pay in the common currency C) likely; labor market integration means that when there are asymmetric demand shocks the adjustment can be eased by migration of workers D) likely; labor force rules and policies can be harmonized more easily

likely; labor market integration means that when there are asymmetric demand shocks the adjustment can be eased by migration of workers

All other things being equal, we expect fixed exchange rates to promote trade by lowering transactions costs. If that is true, then differences in prices measured in a common currency should be ________among countries with ______exchange rates than among countries with ______ rates. A) lower; fixed; floating B) lower; floating; fixed C) higher; fixed; floating D) the same; fixed; floating

lower; fixed; floating

The primary objective of the ECB is to: A) promote economic growth. B) promote full employment. C) foster an equitable distribution of income. D) maintain price stability.

maintain price stability

The marginal propensity to consume goods and services can be broken out into the: A) marginal propensity to invest plus the marginal propensity to save. B) marginal propensity to consume home-produced goods and services plus the marginal propensity to consume imports. C) marginal propensity to spend minus the marginal propensity to save. D) marginal propensity to consume goods plus the marginal propensity to consume services.

marginal propensity to consume home-produced goods and services plus the marginal propensity to consume imports

Larger economic benefits from a currency union occur when: A) there is intense competition between the economies. B) market integration is large, yielding efficiency benefits. C) the central bank acts independently. D) the currency is pegged to the U.S. dollar.

market integration is large, yielding efficiency benefits

A nation joining a currency union must subject itself to the ______ policies of the union, which may or may not conform to its own objectives or economic or political values. A) fiscal B) economic C) monetary D) accounting

monetary

Changing the rate at which the central bank makes loans counts as: A) fiscal policy. B) monetary policy. C) neither fiscal nor monetary policy. D) both fiscal and monetary policy.

monetary policy

The LM curve shows equilibrium in the _______ market at various levels of interest rates and GDP. A) forex B) goods C) equities D) money

money

When the expected real rate of interest declines, ceteris paribus, we expect: A) more investment projects will be undertaken. B) lenders will need to lower their average default rate to maintain their profit margins. C) firms will borrow less and cut back on their investment projects D) individuals will steer clear of equity markets.

more investment projects will be undertaken

If Britain had not joined the ERM, the policy options it would have had available to avoid recession would have been: A) severely limited. B) more numerous and varied. C) subject to veto by the European Parliament. D) a conflict with its desire to maintain a stable economy

more numerous and varied

Prices in the European ERM countries on fixed exchange rates have converged ___ than for nations outside the ERM. A) more slowly B) more rapidly C) more completely D) less completely

more rapidly

Euro-optimists believe the success of the euro to be the result of all of the following, EXCEPT: A) more trade leads to more success for the euro. B) more countries are lining up to join the euro. C) more capital and labor mobility will take place under the euro. D) more scope for asymmetric shocks, rather than symmetric shocks.

more scope for asymmetric shocks, rather than symmetric shocks

In 2005: A) no Eurozone countries satisfied the criterion of having a government debt of less than 60% of GDP. B) all Eurozone countries satisfied the criterion of having a government debt of less than 60% of GDP. C) more than half of Eurozone countries did not satisfy the criterion of having a government debt of less than 60% of GDP. D) only one Eurozone country satisfied the criterion of having a government debt of less than 60% of GDP.

more than half of Eurozone countries did not satisfy the criterion of having a government debt of less than 60% of GDP

If a government must run a balanced budget, then tax revenues and government spending: A) move roughly in opposite directions. B) move exactly in opposite directions. C) move exactly in the same direction. D) move roughly in the same direction.

move exactly in the same direction

Higher costs result from a currency union when: A) nations are economically dissimilar so that demand shocks affect each economy asymmetrically. B) nations are economically similar so that demand shocks affect each economy symmetrically. C) there is intense competition between the economies. D) the currency is pegged to the U.S. dollar.

nations are economically dissimilar so that demand shocks affect each economy asymmetrically

To maintain a functioning gold standard: A) nations are obliged to exchange any amount of issued paper money for gold. B) paper money is not allowed; all transactions must be in coins or gold. C) the monetary authority cannot exchange currency for gold. D) care must be taken to keep inflation under 10%.

nations are obliged to exchange any amount of issued paper money for gold

The Maastricht rules specified budgetary rules such as meeting deficit and debt targets because: A) nations that are able to keep spending down will probably have more money left over to pay their Eurozone dues. B) nations that are fiscally sound will not be tempted to inflate their currency to reduce the real burden of their debt. C) if one nation spends more and taxes less, population will tend to emigrate to that nation. D) the ECB is prohibited from lending to nations, that nation may run out of available credit.

nations that are fiscally sound will not be tempted to inflate their currency to reduce the real burden of their debt

Increasing the transfers from workers to the unemployed counts as: A) fiscal policy. B) monetary policy. C) neither fiscal nor monetary policy. D) both fiscal and monetary policy.

neither fiscal nor monetary policy

As market integration and symmetry between the nations' economies rise, the: A) net benefits of a currency union fall. B) OCA becomes less desirable for each nation. C) political costs of a currency union rise. D) net benefits of a currency union rise.

net benefits of a currency union rise

Research has shown that the inflation in a country is: A) always high if there is a fixed exchange rate. B) always low if there is a flexible exchange rate. C) not dependent on the choice of exchange rate regime. D) higher in developing countries coming out of hyperinflation.

not dependent on the choice of exchange rate regime

According to Richard Baldwin, studies indicating massive increases in trade resulting from currency unions are: A) biased because of use of data from rich countries. B) generally applicable to the euro. C) underestimating the impact of the euro on intra-European Union trade. D) not the result of lowering the transaction costs for trade within the euro area.

not the result of lowering the transaction costs for trade within the euro area

The inside lag is the time between: A) observing a shock and countering it. B) taking an action and observing its effect. C) short-term and long-term goals. D) taking an action and determining future long-term goals

observing a shock and countering it

When nations enter into currency unions, their fiscal affairs continue to be separate. The exception to this situation is whenever a confederation of states has a system: A) whereby monetary policy is decided by consensus rather than centrally. B) of government subsidies for firms exporting outside the union. C) of fiscal mechanisms that permits interstate transfers. D) of common tax policies and regulatory rule.

of fiscal mechanisms that permits interstate transfers

In practice, cooperative agreements are: A) the largest single exchange rate format. B) easy to maintain because they have little impact on the nations. C) often contentious because nations favor their own situations over those of their trading partners. D) impossible to maintain because nations have widely differing systems and values.

often contentious because nations favor their own situations over those of their trading partners

In a reserve currency system (such as the Bretton Woods system or the European ERM), currencies peg to a reserve currency. As a result: A) only the reserve currency country has monetary autonomy. B) all countries, other than the reserve currency country, have monetary autonomy. C) all countries have monetary autonomy. D) no country has monetary autonomy.

only the reserve currency country has monetary autonomy

Which of the following fixed exchange rate regimes has very little monetary policy autonomy? A) dirty float B) open peg C) open nonpeg D) closed

open peg

A currency depreciation affects total spending in the short run through expenditure switching, but the net external wealth effect also can influence: A) other types of expenditure such as consumption or investment. B) the ability of the nation to keep up technologically, since new capital will be more expensive. C) the production function of the home country. D) the ability of the government to conduct monetary policy.

other types of expenditure such as consumption or investment

The time gap between a nation's decision to implement a corrective economic policy and the actual results of the policy is known as the: A) inside lag. B) inside lapse. C) outside lag. D) outside lapse.

outside lag

The pre-2008 boom affected the Eurozone nations, many of which engaged in: A) fiscal restraint. B) overconsumption, excessive and wasteful construction, and asset speculation. C) tight monetary policies that resulted in recession. D) wage restraint policies that angered unions.

overconsumption, excessive and wasteful construction, and asset speculation

When the Bank of England's Mervyn King spoke of "inflation nutters," he was referring to: A) a delicious cookie. B) overly inflation-fearful ECB leaders. C) insufficiently inflation-fearful ECB leaders. D) overly inflation-fearful Bank of England leaders.

overly inflation-fearful ECB leaders

Qualifying for admission to the Eurozone requires a nation to: A) petition for membership with the European parliament. B) demonstrate a commitment to democratic principles and take an antiterrorist stance. C) peg its exchange rates to the euro and demonstrate fiscal responsibility for a length of time. D) join the IMF and the UN, and be recommended by other members.

peg its exchange rates to the euro and demonstrate fiscal responsibility for a length of time

After World War II, many currencies were: A) losing value because of the war's devastation. B) still on the gold standard. C) suffering from high inflation. D) pegged to the U.S. dollar.

pegged to the U.S. dollar

Limiting net external wealth effects could be accomplished by limiting movements in the exchange rate. What measure might address this situation? A) devaluing the currency B) keeping nominal interest rates exactly 1% higher than one's trading partners C) borrowing only in U.S. dollars D) pegging the exchange rate to the currency of the largest creditor nation

pegging the exchange rate to the currency of the largest creditor nation

The problem of currency mismatch of net external wealth can be mitigated by: A) ensuring the creditor countries always denominate loans in U.S. dollars. B) promoting internal financial markets where foreign securities can be traded. C) restricting borrowing yet encouraging lending. D) piling up large stocks of foreign currency assets in central bank reserves and sovereign wealth funds.

piling up large stocks of foreign currency assets in central bank reserves and sovereign wealth funds

Which of the following is NOT a reason for the inability to stabilize output? A) lags between observation and action B) policy actions can immediately take effect C) policy constraints D) preference to maintain long-range goals

policy actions can immediately take effect

Sometimes a change in the real effective multilateral exchange rate has the opposite result from what one would expect. One explanation may be that: A) buying habits are very strong and firms and consumers continue their behavior despite large changes in prices of imports. B) price changes do not bring about immediate responses in import or export volume because of contracts, or firms' difficulty in changing suppliers quickly. C) the theory is fundamentally flawed and does not predict well. D) there are other factors we are not considering that affect the trade balance.

price changes do not bring about immediate responses in import or export volume because of contracts, or firms' difficulty in changing suppliers quickly

Technically, the ECB has a dual mandate of price stability and support of the European economies; but in practice, it seems to favor ______ over ______. A) lowering unemployment; controlling inflation B) promoting equality; lowering unemployment C) price stability; economic performance, growth, and employment D) women's rights; lower taxes on small business

price stability; economic performance, growth, and employment

Criticisms of the ECB center on its primary focus on ______ with less (but perhaps more needed) focus on _______. A) unemployment and GDP growth; exchange rates B) exchange rates; inflation problems C) price stability; unemployment and GDP growth D) political cohesiveness; price stability

price stability; unemployment and GDP growth

Under a fixed exchange rate regime, an expansionary fiscal policy would ____ interest rates and GDP, which would cause ____ pressure on the exchange rate, forcing the monetary authority to undertake a(n) ______ monetary policy. A) raise; downward (appreciation); expansionary B) lower; upward (depreciation); contractionary C) raise; upward (depreciation); contractionary D) lower; downward (appreciation); expansionary

raise; downward (appreciation); expansionary

A short-run open-economy model with demand shocks can analyze the effect on _____ if output prices and factor prices are sticky. A) inflation B) real economic activity (real GDP and unemployment) C) long-run variables D) expectations

real economic activity (real GDP and unemployment)

In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, assuming Britain maintains its exchange rate peg, the likely impact on the British economy would be a(n): A) recession. B) inflationary economy. C) stronger pound. D) decrease in taxes.

recession

When exchange rates are fixed, a government, to counter a temporary negative demand shock, should, in part: A) reduce taxes. B) reduce defense spending. C) reduce the money supply. D) reduce defense spending and the money supply

reduce taxes

In a noncooperative pegged situation, when the home country devalues in response to an external shock the: A) foreign nation will also devalue, endangering the peg. B) home country suffers the entire burden. C) resulting depreciation causes a large shift in demand from the foreign nation to the home country, thereby exporting the recession to the foreign nation. D) nations agree to switch their peg to the U.S. dollar.

resulting depreciation causes a large shift in demand from the foreign nation to the home country, thereby exporting the recession to the foreign nation

In a noncooperative environment of pegged exchange rates, if the home nation is experiencing high inflation due to excessive demand, it may choose to ______, which would cause______. A) forgo the pegged exchange rate; extreme depreciation B) devalue its currency; the foreign nation to suffer deficient demand for its products C) cut the monetary growth rate; a rise in interest rates D) revalue its currency; the foreign nation to suffer excessive demand for its products

revalue its currency; the foreign nation to suffer excessive demand for its products

Considering only the goods and forex markets, as the economy adjusts to lower rates of interest and equilibrium is restored, the level of GDP will: A) fall. B) rise. C) become unstable. D) decline very gradually.

rise

If the Deutsche Mark and the British pound exchange rates are fixed, and the German Bundesbank conducts a tight monetary policy to counteract an expansion in German GDP, interest rates in Germany will ____, which will force Britain to ______. A) fall; default B) rise; raise its rates to maintain interest parity and the fixed exchange rate C) fall; sell gold D) rise; lower its rates to maintain interest parity and the fixed exchange rate

rise; raise its rates to maintain interest parity and the fixed exchange rate

The LM curve shows that, with a fixed supply of money, as GDP rises, the demand for money will ____ and the rate of interest will ____. A) rise; rise B) fall; fall C) rise; fall D) fall; rise

rise; rise

With a fixed supply of money, as GDP rises, the demand for money ____ and therefore ____ must rise to encourage savers to hold financial assets instead of cash. A) falls; prices B) rises; incomes C) rises; rates of interest D) falls; taxes

rises; rates of interest

When a nation prints money (rather than taxing directly) to finance its government spending, it results in inflation, and purchasing power of the private sector falls. This is known as: A) benchmarking. B) indirect taxation. C) seigniorage. D) creeping inflation.

seigniorage.

If the demand for money decreases, ceteris paribus, the LM curve would: A) shift right. B) shift left. C) remain constant. D) slope more steeply.

shift left

If the central bank in a foreign country increases its interest rate, then the IS curve of the domestic economy will: A) shift to the right. B) shift to the left. C) not shift at all. D) shift to the right because U.S. exports will decrease.

shift to the right

Some studies find that trade in the Eurozone has risen substantially, but compared with the control group of nations that stayed out, Baldwin finds the effect is: A) larger (25%) because prices have fallen and trade has increased by much more than the control group. B) just about the same because the control group is very similar to nations in the Eurozone. C) somewhat larger (9%) because there has been no measurable price decline within the union or evidence of trade diversion. D) much smaller (-2%) because trade within the union has been lackluster, whereas trade with the control group has increased dramatically.

somewhat larger (9%) because there has been no measurable price decline within the union or evidence of trade diversion

A recent article in the Financial Times summarizes and criticizes the standard approach to focusing responsibility for the Eurozone debt crisis, for which it blames: A) the operations of the ECB. B) the restraint on borrowing, which is an integral part of the Eurozone convergence criteria. C) the irresponsibility of the ECB for funding domestic bank purchases of their government's bond issues. D) speculators, irresponsible fiscal deficits, and poor risk assessment.

speculators, irresponsible fiscal deficits, and poor risk assessment

The Stability and Growth Pact (SGP) adopted in 1997 addressed concerns related to the: A) tendency of nations to let their fiscal discipline promises slip once they had attained Eurozone member status. B) micromanagement tendency of the ECB toward its members. C) loss of political power of the European Parliament. D) tendency of nations to revert to using their own national currencies.

tendency of nations to let their fiscal discipline promises slip once they had attained Eurozone member status

The assumption of short-run price stickiness implies: A) that we must adjust nominal quantities for changes in inflation. B) that we must always allow for unexpected inflation. C) that expected inflation is zero and nominal quantities are the same as real. D) a balanced budget.

that expected inflation is zero and nominal quantities are the same as real

Some say the ECB draws too heavily on the German model. What is its major focus? A) reliance on the ability of the European parliament to engage in fiscal policy when necessary B) the notion that the economy needs monetary stimulus to weather frequent recessions C) that the unemployment problem, especially in Eastern Europe, should take priority over price stability D) that price stability (low inflation) is the primary policy goal, separated from political influence or having to address regional economic slowdowns

that price stability (low inflation) is the primary policy goal, separated from political influence or having to address regional economic slowdowns

In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, assuming Britain does not maintain its exchange rate peg: A) the only option available to Britain would be to increase its interest rate. B) the British pound would depreciate. C) the British pound would appreciate. D) the British economy would slow down.

the British pound would depreciate

The impetus to form an administrative body in Europe after World War II to distribute Marshall Plan aid and coordinate trade and other common issues resulted in three organizations: A) the WTO, the GATT, and the IMF. B) the European Payments Union, the UN, and the early roots of the European Union. C) the European Payments Union, the European Coal and Steel Community, and Euratom. D) the Eastern bloc, the Warsaw Pact, and NATO.

the European Payments Union, the European Coal and Steel Community, and Euratom

The OCA of the European Union falls short of the United States, for each of the following reasons, EXCEPT: A) labor market integration in the European Union is weaker. B) goods market integration in the European Union is weaker. C) fiscal transfers are negligible. D) the European Union has more asymmetric shocks.

the European Union has more asymmetric shocks

A currency union would be beneficial to nations with symmetrical demand shocks so that a coordinated monetary policy is possible. Comparing the Eurozone with the United States, the finding is: A) the Eurozone nations and the U.S. states are markedly different in the correlation between growth rates of GDP. B) the Eurozone nations and the U.S. states are quite similar in terms of correlation between growth rates of GDP. C) the Eurozone nations have higher growth rates of GDP in their member states, whereas the United States exhibits lower growth rates. D) the Eurozone is much more diverse in terms of its growth in GDP.

the Eurozone nations and the U.S. states are quite similar in terms of correlation between growth rates of GDP

What currency was the base, or center, currency in the ERM used in Europe during the 1980s and 1990s? A) the French franc B) the British pound C) the German mark D) the Italian lira

the German mark

At some rate of interest, i, domestic demand is equal to output, and at some exchange rate, the domestic return is equivalent to the foreign return. This must be one point on: A) the IS curve. B) the aggregate expenditure line. C) the supply curve. D) the LM curve.

the IS curve

When a depreciation in the nation's real effective exchange rate initially lowers the trade balance and then increases it, economists refer to the phenomenon as: A) the K curve effect. B) the J curve effect. C) the real balances effect. D) the marginal propensity to import.

the J curve effect

Having one central bank responsible for managing the common currency and replacing the national monetary authority provides benefits that include all of the following, EXCEPT: A) independence and the ability to resist political pressure. B) better performance in keeping inflation stable with no large swings in unemployment. C) the ability to tailor the supply of money for a variety of economic conditions in the member states. D) provision of a stable nominal anchor.

the ability to tailor the supply of money for a variety of economic conditions in the member states

Britain's 1992 recession is probably the result of: A) the struggle to reconcile monetary and fiscal policy. B) the adherence to the ERM, which required Britain to raise interest rates to maintain exchange parity. C) high unemployment rates, which are a product of the generous welfare system. D) poor planning for the conversion to the euro.

the adherence to the ERM, which required Britain to raise interest rates to maintain exchange parity

If there is a center country to which other nations peg under a noncooperative arrangement, which nation(s) have monetary policy authority? A) none B) all C) industrialized nations only D) the center nation only

the center nation only

Great Britain opted out of the ERM in 1992 because its government concluded that: A) it wanted to increase its trade with North America rather than Europe. B) the gains from being a member of the ERM outweighed the costs from higher German interest rates. C) the costs associated with higher German interest rates outweighed the gains from being a member of the ERM. D) it was unable to agree with the French on an exchange rate between the pound and the French franc.

the costs associated with higher German interest rates outweighed the gains from being a member of the ERM

The decision by a nation to join a currency union is based on: A) the size of the nation's GDP. B) the diversification of its industry and population. C) the cost of designing, printing, and managing a national currency. D) the costs of abandoning a national currency versus the benefits of a common currency.

the costs of abandoning a national currency versus the benefits of a common currency

Euro-pessimists have argued that the euro is not successful, based on all of the following, EXCEPT: A) linguistic barriers make labor migration difficult. B) Maastricht Treaty rules have been largely abandoned. C) the deficit surveillance program has been a success. D) the lack of political support.

the deficit surveillance program has been a success

Reasons for the ECB acceding to a bailout of troubled financial sectors in Eurozone nations include all the following, EXCEPT: A) the desire to recognize bad loans by writing them off to protect the fragile fiscal situation of the troubled nations. B) the desire to prevent a loss of confidence in euro-denominated debt. C) a desire to protect core EU banks. D) a desire to protect the collateral assets in the ECB portfolio.

the desire to recognize bad loans by writing them off to protect the fragile fiscal situation of the troubled nations

Euro-optimists believe that the Eurozone has been successful because: A) it has not collapsed since its inception. B) the euro is becoming a reserve currency for foreign central banks. C) European inflation has fallen to 10% annually. D) there are no exit mechanisms for countries to leave the Eurozone.

the euro is becoming a reserve currency for foreign central banks

Originally considered by economist Robert Mundell, decades later, in 2001, Europe adopted a new common currency now known as: A) the euroyen, ¥. B) the eurodollar, $. C) the europa, . D) the euro, €.

the euro, €

The open-economy IS curve slopes down because any change in the foreign or home interest rate will inversely affect demand, along with a secondary effect from a change in: A) the rate of depreciation of assets. B) the exchange rate and the trade balance. C) the real interest rate. D) the growth rate of money.

the exchange rate and the trade balance

Investment occurs when: A) firms are very profitable and have lots of extra cash on hand. B) there is a reduction in risk aversion. C) the expected real interest rate is less than the expected real return on the investment project. D) individuals realize that there are greater long-term gains in the equity and credit markets.

the expected real interest rate is less than the expected real return on the investment project

An important factor in the choice of an exchange rate regime in low-income nations is: A) the credentials of the finance minister. B) the extent of liability dollarization, which can cause contractions when the home currency depreciates. C) how dependent the nation is on imports, which must be financed by external borrowing. D) the price level and how it affects the interest rate level in the nation.

the extent of liability dollarization, which can cause contractions when the home currency depreciates

Trade dollarization refers to: A) the practice of insisting on trade in U.S. dollars. B) the fact that many international commodities are traded in U.S. dollars only. C) the fact that many dollars have flowed out of the U.S. and are used in other nations as their national currency. D) the falling dollar combined with a rising trade balance.

the fact that many international commodities are traded in U.S. dollars only

Shortcomings and weaknesses of the SGP did NOT involve: A) the difficulty of correctly assessing a member's budgetary condition. B) the fact that transgressions and breaking rules had no sure consequences because members tended to forgive their peer nations. C) nations refusing to allow their economies to go into recession to meet a Eurozone budgetary target. D) the fact that transgressions and breaking rules had critical consequences to nations.

the fact that transgressions and breaking rules had critical consequences to nations

The principle involved in short-run uncovered interest parity is that home interest rates will be equal to: A) the world equilibrium real rate of interest. B) the foreign interest rate minus foreign inflation. C) the foreign rate of interest plus the expected rate of depreciation of the home currency. D) the domestic nominal rate of interest plus domestic inflation.

the foreign rate of interest plus the expected rate of depreciation of the home currency

Along the IS curve, which of the following markets are in equilibrium? A) the money and forex markets B) the goods and forex markets C) the goods and money markets D) the goods, money, and forex markets

the goods and forex markets

The greater the degree of economic integration between markets in the home country and the base country: A) the greater the volume of transactions and the greater the benefit to the home country of fixed exchange rates. B) the smaller the volume of transactions and the lesser the benefit to the home country of fixed exchange rates. C) the greater the volume of transactions and the greater the benefit to the home country of flexible exchange rates. D) the less important the volume of transactions and the greater the importance of ethnic similarities.

the greater the volume of transactions and the greater the benefit to the home country of fixed exchange rates

If there is a greater degree of economic integration between markets in the home country and the base country: A) the home country will benefit to a greater degree by fixing its exchange rate with the base country. B) efficiency will be reduced with fixed exchange rates. C) flexible exchange rates will result in GDP stability. D) the volume of transactions will be too low to justify an elaborate exchange rate policy.

the home country will benefit to a greater degree by fixing its exchange rate with the base country

When we measure the impact of exchange rate changes on a nation's trade balance, the bilateral exchange rates explain only part of the change. To assess the overall change, we need to calculate: A) the home multilateral exchange rate, or real effective exchange rate. B) a nation's income versus income changes in the rest of the world. C) a nation's marginal propensity to consume imports. D) the movement over time of the trade balance along with long-run expectations of the exchange rate.

the home multilateral exchange rate, or real effective exchange rate

Another benefit from entering a currency union that is not optimal would include: A) the idea that economies interconnected in a currency union with increased trade also develop a symmetry of demand shocks. B) the reduction of interdependence and an increase in self-sufficiency. C) the cessation of disagreement over trade protection. D) the possibility of increasing the currency area.

the idea that economies interconnected in a currency union with increased trade also develop a symmetry of demand shocks

Economists are concerned that a large cost to nations entering into a monetary union is: A) the inability to collect taxes. B) the inability to rescue banks or stimulate the economy via a lender-of-last-resort mechanism. C) the tendency toward ever higher deficits. D) sticky prices.

the inability to rescue banks or stimulate the economy via a lender-of-last-resort mechanism

A key point in the difference between the United States and the European Union as OCAs, is that: A) the intra-European Union trade is significantly higher than the intrastate trade in the United States. B) the intra-European Union trade is significantly lower than the intrastate trade in the United States. C) the intra-European Union labor migration is much higher than the intrastate migration in the United States. D) in the United States, language creates a significant barrier.

the intra-European Union trade is significantly lower than the intrastate trade in the United States

The difference between asymmetric and symmetric shocks is that: A) the former results in no conflicts in policy goals between countries. B) the latter results in policy conflicts between countries. C) the latter results in identical policies being implemented. D) the former is favored over the latter.

the latter results in identical policies being implemented

Other issues that exist within the ECB include all of the following, EXCEPT: A) the level of competence of officials. B) the lack of formal accountability. C) an insistence on consensus decisions, which could cause policy responses to lag. D) too much independence, causing other Eurozone entities to believe they have no voice.

the level of competence of officials

In 2004, retailers and exporters in the United States were happy, as were their customers from abroad, because of: A) a reduction in import tariffs by the EU. B) the lifting of an embargo on U.S. exports to Germany. C) the high value of the U.S. dollar compared with other currencies. D) the low value of the U.S. dollar compared with other currencies.

the low value of the U.S. dollar compared with other currencies

The slope of the consumption function relates changes in consumer spending to changes in disposable income received by consumers. This is called: A) the marginal propensity to consume. B) the average propensity to consume. C) the utility-maximization function. D) the marginal rate of transformation

the marginal propensity to consume

Based on economic criteria, a nation should choose a fixed exchange rate if: A) the monetary authorities are capable of handling shocks. B) the net benefits of fixing versus floating are positive. C) the net benefits of fixing versus floating are negative. D) there is a liberal political agenda that restricts government authority over capital flows.

the monetary authorities are capable of handling shocks

Monetary policy to stabilize the nation is less desirable whenever: A) the nation is a net external debtor with liabilities denominated in foreign currency. B) the nation is a net external creditor with assets denominated in foreign currency. C) the central bank of the nation must also finance government deficits. D) the government is unable to raise taxes sufficiently to lower its deficit.

the nation is a net external debtor with liabilities denominated in foreign currency

Under the gold standard system, 1 ounce of gold was worth $23 in the United States and worth 15.5 pounds in Great Britain. If the price of gold in Great Britain decreases by 10%, then: A) the new exchange rate would show approximately 10% depreciation of the dollar. B) $1 = 1.64 pounds. C) 1 pound = $1.64. D) the new exchange rate would show approximately 10% depreciation of the dollar, and 1 pound would be equal to $1.64.

the new exchange rate would show approximately 10% depreciation of the dollar, and 1 pound would be equal to $1.64

Normally, a firm's borrowing cost is the expected real interest rate, which takes expected inflation into account. With price stickiness, however, the firm will consider only: A) expected inflation. B) expected wages. C) the nominal rate of interest. D) the expected appreciation of the asset.

the nominal rate of interest

If we assume sticky prices in both foreign and domestic trading nations, the rate of pass-through from the nominal to the real exchange rate falls as: A) the percentage of traded goods priced in foreign currencies rises. B) the percentage of traded goods priced in the domestic currency rises. C) the percentage change in the exchange rate exceeds the percentage increase in inflation. D) traders find new markets and are able to avoid nations with currency depreciations.

the percentage of traded goods priced in foreign currencies rises

A gold standard pegs the currency to: A) another nation that also adopts a gold standard. B) a basket of metals: gold, silver, platinum, and palladium. C) the price of gold in local currency. D) the U.S. dollar.

the price of gold in local currency

The LM curve describes the relationship between interest rates and GDP for which the supply of money is equal to the demand for real balances, holding _____ constant. A) expectations B) tastes and preferences C) the quantity of money D) expectations, tastes, and the quantity of money

the quantity of money

When analyzing the impact of government consumption and taxes in an open economy, we assume that: A) the reasons for changing fiscal policy are not important. B) government deficits are a problem for the domestic and international economy. C) governments always have a balanced budget. D) governments often do not coordinate their tax and spending policies with those of other nations.

the reasons for changing fiscal policy are not important

A nation's total external wealth is calculated as: A) the sum of total assets minus total liabilities expressed in local currency. B) total assets expressed in foreign currency minus total liabilities expressed in foreign currency. C) the sum of total assets minus total liabilities expressed in foreign currency. D) the sum of physical assets within the nation, domestic stock market capitalization, and government assets minus total liabilities.

the sum of total assets minus total liabilities expressed in local currency

The J curve effect means that import prices are higher, thus revenues paid out increase while export prices are lower and incoming revenues decrease. Therefore, after a currency depreciation: A) the trade balance will improve, then decline, then improve, and then decline, appearing to be a series of J shapes. B) the trade balance will increase, then decrease, then jump higher, which economists call the J curve effect. C) the nation will cut back on imports immediately causing the trade balance to improve, which gives the curve an inverted J shape. D) the trade balance decreases and then increases over time giving the curve a J shape.

the trade balance decreases and then increases over time giving the curve a J shape

Economic benefits to nations in a currency union will be larger whenever: A) the volume of transactions between the nations is larger and there is a greater degree of economic integration. B) the volume of transactions is smaller but there is a greater degree of economic integration. C) trade and financial flows between the nations are erratic. D) financial integration is lower but cultural integration is higher.

the volume of transactions between the nations is larger and there is a greater degree of economic integration

Because of differences in culture and language, it is not surprising that: A) Eurozone nations are opposed in theory to the currency union but accept it in practice. B) Eurozone nations tend to be more homogeneous than states in the United States. C) demand shocks tend to be symmetric, whereas supply shocks are asymmetric. D) the year-to-year flow of people between states in the United States is larger than the same flow between member nations in the Eurozone.

the year-to-year flow of people between states in the United States is larger than the same flow between member nations in the Eurozone

When the interest rate is so low that the opportunity cost of holding money is zero, then economists say we have reached: A) the era of total liquidity. B) the zero lower bound situation, which means the U.S. economy may be in a liquidity trap. C) full monetary saturation. D) a situation in which a nation must use caution, since monetary policy is "super" effective.

the zero lower bound situation, which means the U.S. economy may be in a liquidity trap

Some nations benefit absolutely from abandoning their monetary policy and control of their currency because: A) their monetary policy permitted high inflation under pressure from political interests that would not be present under a common currency arrangement. B) they did not have sufficient currency in their own nation to support a higher GDP. C) they had a strong currency, which hurt their exports. D) the central bank would keep the money supply under tight control, which is not good for economic expansion and jobs.

their monetary policy permitted high inflation under pressure from political interests that would not be present under a common currency arrangement

A government policy deemed to be "temporary" indicates: A) only long-run expectations are unchanged. B) only expected exchange rates are unchanged. C) only prices are not flexible in the short run. D) there are sticky prices, fixed expected exchange rates, and constant long-run expectations.

there are sticky prices, fixed expected exchange rates, and constant long-run expectations

Euro-pessimists point out that: A) rates of economic growth and inflation have converged to abysmally low levels in all Eurozone countries. B) there are still wide differences in rates of economic growth and inflation among Eurozone countries. C) the euro has appreciated considerably against the U.S. dollar. D) inflation rates have converged, but rates of economic growth have diverged among Eurozone countries.

there are still wide differences in rates of economic growth and inflation among Eurozone countries

Whenever a nation has substantial external debts and assets denominated in foreign currency: A) it is easier to manage, since changes in value are often offsetting. B) there can be large and destabilizing wealth effects. C) its interest payments on the debt will be matched by interest earnings on the assets. D) the risk of default becomes very large.

there can be large and destabilizing wealth effects

The total demand line will shift whenever: A) the MPC increases. B) output changes. C) there is an exogenous change in one of its components (C, I, G, or X). D) aggregate supply increases.

there is an exogenous change in one of its components (C, I, G, or X)

Unlike in the long-run model, in the short-run Keynesian model, we make two critical assumptions: that firms adjust production depending on _______, and that _______. A) total demand; prices are fixed B) resource limitations; prices are flexible C) the market rate of interest; consumers maximize utility D) consumer spending; there is full employment

total demand; prices are fixed

Aggregate supply is the same thing as: A) total national spending. B) total domestic production. C) aggregate demand. D) a supply shock.

total domestic production

Which of the following is one of the convergence criteria that countries needed to satisfy to join the Eurozone? A) 10 consecutive years in the ERM band without devaluation of its currency B) a government deficit of no more than 25% of GDP in the previous year C) total government debt of no more than 60% of GDP in the previous year D) an inflation rate of 0% in the previous 10 consecutive years

total government debt of no more than 60% of GDP in the previous year

When exchange rates are volatile: A) firms are assured that they will be able to earn profits from currency swings. B) firms engage in more trade. C) trade and cross-border financial and labor flows are reduced as uncertainty and transaction costs take their toll. D) international economic activity is increased.

trade and cross-border financial and labor flows are reduced as uncertainty and transaction costs take their toll

Assumptions that output is fixed and factor prices have adjusted to reach the level of full employment are: A) useful for long-run analysis. B) necessary for short-run analysis. C) unrealistic to the extent that economists should not make such assumptions. D) always true and therefore useful both in the long run and short run.

useful for long-run analysis

The fiscal shock in Germany due to reunification caused the Bundesbank to pursue a monetary policy that: A) was appropriate for Britain, since it had experienced a similar shock. B) was appropriate for all the other ERM nations but not Britain. C) was appropriate only for Germany, since neither Britain nor other ERM nations experienced a similar shock. D) had poor timing, since the monetary action should have come before the reunification.

was appropriate only for Germany, since neither Britain nor other ERM nations experienced a similar shock

A currency union is: A) a trade agreement between countries. B) a customs union between countries. C) when countries abandon their domestic currency and adopt a common currency. D) a free trade area.

when countries abandon their domestic currency and adopt a common currency

What is meant by the term inflation bias? A) when policymakers allow exchange rates to continually depreciate and are willing to accept higher rates of inflation B) when policymakers accept higher rates of inflation and are willing to allow exchange rates to continually depreciate C) when policy makers use expansionary monetary policy for short-term gain, at the expense of higher inflation in the longer run D) when fiscal policymakers use deficit financing to stimulate the economy at the expense of higher long-run inflation

when policy makers use expansionary monetary policy for short-term gain, at the expense of higher inflation in the longer run

Fear of floating is: A) when the benefits of floating exchange rates outweigh the costs. B) when the attractions of fixed exchange rates are large relative to those of floating. C) when countries adopt the gold standard. D) when countries say they are floating, but fix their exchange rates in practice.

when the attractions of fixed exchange rates are large relative to those of floating

Asymmetric shocks pose a problem for nations linked by fixed exchange rates to a base currency. In general: A) the home nation always has a better outcome than its foreign trading partner. B) both nations share a common currency and so will experience equal results. C) when the base currency nation takes any action to counteract the shock, it forces its exchange rate partner to do the same to maintain its peg. D) both nations only get half the benefit of any economic policy.

when the base currency nation takes any action to counteract the shock, it forces its exchange rate partner to do the same to maintain its peg

In the Keynesian model, when is the economy in short-run equilibrium? A) when there is no inflation B) when there is full employment C) when there is a balanced federal budget D) when total spending (demand) is equal to production (supply)

when total spending (demand) is equal to production (supply)

Because of international time lags between ordering and the receipt of goods, a depreciation of a currency: A) will not change import or export volumes for a time, since prices on orders already placed cannot be renegotiated. B) will immediately change import and export volumes, because buyers and sellers always include an opt-out clause. C) will affect import and export volumes in third countries not party to the particular transaction. D) will never change import or export volumes.

will not change import or export volumes for a time, since prices on orders already placed cannot be renegotiated

If there is an increase in government spending, then, ceteris paribus, the IS curve: A) will shift to the left. B) will shift to the right. C) will not shift at all. D) will shift to the left if there is a corresponding decrease in taxes.

will shift to the right

What assumption results in investment depending only on the nominal interest rate? A) rationality B) zero expected inflation C) uncertainty D) The MPC is less than 1.

zero expected inflation

One might expect the interest rate correlation between nonpegs and closed economies with the base currency to be ____, but because of other circumstances, there may be a ____ correlation. A) negative; positive B) positive; negative C) zero; positive D) negative; zero

zero; positive

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