ECO 336 - Chapter 11

Assuming a flexible exchange rate system, a decrease in the money supply leads to ______ in the value of the US dollar and _____ in the value of foreign currency That in turn, leads ____ in net exports and aggregate demand A decrease in the money supply leads to ___ interest rates This, in turn, leads to _____ in investment spending by firms and aggregate demand

an increase a decrease a decrease an increase a decrease

Which of the following is least liquid? A.) House B.) A share of publicly traded stock C.) Currency D.) A three-month Treasury bill

A.) House

When the US dollar depreciates, it is predicted A.) the US current account will worsen in the short run and improve in the long run B.) the US current account will improve for a little bit in the short run and improve substantially in the long run C.) US firms and individuals will immediately change from foreign sources of import to domestic sources of products D.) the relative price of US imports will decrease

A.) the US current account will worsen in the short run and improve in the long run

Which of the following is/are examples of expansionary fiscal policy A.) An increase in money supply by the fed B.) An increase in government spending C.) An increase in taxes D.) All of the above E.) None of the above

B.) An increase in government spending

If the economy's output is initially above full employment, which of the following policy would restore full employment and keep the exchange rate at the same level? A.) Contractionary monetary policy and expansionary fiscal policy B.) Contractionary monetary and fiscal policy C.) Contractionary fiscal policy and expansionary monetary policy D.) Expansionary fiscal and monetary policy

B.) Contractionary monetary and fiscal policy

How does one explain the changing slope of the aggregate supply curve A.) The AS curve is more vertical when inflation causes prices to rise rapidly and is more horizontal when constant money supply keeps prices stable B.) The AS curve is more horizontal when the economy is below full employment and is more vertical when the economy is running at full employment C.) The AS curve is more horizontal when the country is isolated from the world economy, and is more vertical when the country is integrated with the world economy D.) The AS curve is more vertical when firms stop investing and is more horizontal when firms invest freely

B.) The AS curve is more horizontal when the economy is below full employment and is more vertical when the economy is running at full employment

The opportunity cost of money holding is A.) The reduction in purchasing power brought on by deflation B.) The alternative interest income foregone from not holding some other asset C.) The liquidity foregone from not holding some other asset D.) All of the above

B.) The alternative interest income foregone from not holding some other asset

Assume Japan begins with its economy running at full employment. If the Japanese government increases government expenditures the AS/AD model shows that in the short run, A.) The AS curve will shift out, causing an increase in Japanese output and in the Japanese price level B.) the AD curve will shift out, causing an increase in the Japanese price level, but not change in output C.) The AS curve will shift out, causing an increase in the Japanese price level, but not change in output D.) The AD curve will shift out, causing an increase in Japanese output and in the Japanese price level

B.) the AD curve will shift out, causing an increase in the Japanese price level, but not change in output

The current account may fall after a real depreciation because A.) Foreign purchasers refuse to buy home goods even though they are cheaper B.) Imports and exports are actually insensitive to the exchange rate C.) Import orders are placed in advance and a depreciation raises the domestic price D.) Central bank intervention will distort mark mechanisms

C.) Import orders are placed in advance and a depreciation raises the domestic price

During the second half of the 1980's, the US depreciated the dollar in hopes that it would reduce the current account deficit. After a year the deficit was actually larger and newspaper editoralists were writing columns claiming that there is no link between the exchange rate and the current account. What did the writers not account for in their claims. A.) The writers were using incorrect data in their comparisons B.) The policies implemented were not in the correct direction C.) There are lags associated with implemented policies D.) The writers were actually correct in their assessments

C.) There are lags associated with implemented policies

Some countries have fixed exchange rate systems instead of flexible exchange rate systems, which of the following is a reason why fixed exchange rate systems have limited abilities to use monetary policy A.) Under fixed exchange rate systems, if a central bank conducts a monetary policy, there is no change in domestic interest rates because people only respond to exchange rate changes B.) Under a fixed exchange rate system, central banks do not exist so monetary policy cannot be conducted C.) Under a fixed exchange rate system, if a central bank conducts a monetary policy, then it puts pressure on the exchange rate and the central bank would have to offset the effect D.) All of the above

C.) Under a fixed exchange rate system, if a central bank conducts a monetary policy, then it puts pressure on the exchange rate and the central bank would have to offset the effect

An increase in disposable income worsens the current account because A.) it raises the real exchange rate and therefore worsens the current account B.) it raises consumption which reduces exports because now there are fewer goods that can be exported and more are consumed domestically C.) consumers demand more of all goods, including imported goods, while exports are not affected D.) it lowers the real exchange rate and therefore worsens the current account

C.) consumers demand more of all goods, including imported goods, while exports are not affected

When there is a change in government spending or taxes to affect aggregate economic activity, this is referred to as A.) political posturing B.) monetary policy C.) fiscal policy D.) aggregate policy When the money supply is changed to affect aggregate economic activity, this is referred to as A.) political posturing B.) monetary policy C.) fiscal policy D.) aggregate policy Which of the following is correct? A.) the president and congress conduct monetary policy and the fed conducts export policy B.) the president and congress conduct fiscal policy and the fed conducts monetary policy C.) the president and congress conduct monetary policy and the fed conducts fiscal policy D.) None of the above

C.) fiscal policy B.) monetary policy B.) the president and congress conduct fiscal policy and the fed conducts monetary policy

The multiplier effect is dampened by A.) imports B.) Savings C.) taxes D.) All of the above E.) None of the above

D.) All of the above

If the central bank purchases assets (bonds) the economic result is A.) An increase in the central bank's net worth B.) A decline in the money supply C.) A decline in the central bank's net worth D.) An increase in the money supply

D.) An increase in the money supply

A J-curve describes A.) Inflation bias B.) The exchange rate overshooting effect C.) The desired level of the current account D.) The gradual effect of real depreciation on the current account

D.) The gradual effect of real depreciation on the current account

If a country implements an contractionary monetary policy, the short to medium term effects include A.) a decrease in the country's interest rate and a depreciation of the country's currency B.) a decrease in the country's interest rate and an appreciation of the country's currency C.) an increase in the country's interest rate and a depreciation of the country's currency D.) an increase in the country's interest rate and an appreciation of the country's currency

D.) an increase in the country's interest rate and an appreciation of the country's currency

When the fed does an open market operation to increase the money supply, it A.) sells bonds to individuals and financial institutions B.) reduces regulation on financial lending institutions to increase the multiplier effect C.) prints money, which is put into circulation through a tax cut on wages D.) buys bonds from individuals and financial institutions

D.) buys bonds from individuals and financial institutions