Macroeconomics

An economy is producing at a level of output that is equal to the full-employment level of output. Prices of a fundamental resource, such as oil, increase significantly. What would be the best monetary policy? A) stimulative policy B) restrictive policy C) stimulative policy followed by a restrictive policy D) restrictive policy followed by a stimulative policy E) There is no obviously correct policy, unless you can specify your goals.

E

why do countries not specialize

law of increasing opportunity cost, world demand, transaction cost, national security

effectiveness lag for monetary policy

long

implementation lag for fiscal policy

long

cons of flexible exchange rate regime

long term risks

what are the main components of the current account

trade in goods and services, investment income, wages and transfer payments

two reasons monetary policy is less effective in recession

zero interest rate limit and shift in investor and consumer demand function

increase in US income has what effect on the yuan

appreciate

increase in US inflation has what effect on the yuan

appreciate

increase in rate of return of US direct investment in china has what effect on the yuan

appreciate

term of trade

how much of one good is traded for another good

what are the arguments to justify trade protection

infant industry, job protection

monetary policy is more effective in

inflation

"International trade" refers to A) any transaction across an international border. B) buying or selling of preexisting assets across an international border. C) purchasing or selling currently produced goods or services across an international border. D) any financial transaction across an international border.

A

"An increase in the budget deficit can be beneficial for the economy," said a member of Congress during the November budget debates. Could this statement be true? A) Yes B) No

A

Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment? A) The purchase of government securities in the open market and an increase in government spending. B) The sale of government securities in the open market and a decrease in taxes. C) The sale of government securities in the open market and a decrease in government spending. D) The purchase of government securities in the open market and an increase in taxes.

A

Globalization of resource markets has resulted in the business practice of offshoring, which involves A) both an outflow as well as an inflow of jobs in the U.S. B) only an outflow of jobs away from the U.S. C) no possible expansion of jobs in the U.S. D) huge losses to consumers in the U.S.

A

If the Chinese government seeks to weaken its currency, the renminbi, it will likely ____________. A Sell its currency, the renminbi, causing it to lose value B Buy its currency, the renminbi, causing it to lose value C Sell the dollar, causing the renminbi to lose value D None of the above

A

If the U.S. alone were to reduce tariffs on imported goods, how would imports and the value of the dollar be affected? A U.S. imports would increase and the value of the dollar would fall. B U.S. imports would increase and the value of the dollar would rise. C U.S. imports would decrease and the value of the dollar would fall. D U.S. imports would decrease and the value of the dollar would rise.

A

Ignoring the effects on prices, which of the following is accurate? A An increase in GDP created by an increase in aggregate demand will likely cause a decrease in a trade surplus. B An increase in a trade deficit will likely cause an increase in GDP. C A decrease in GDP caused by a decrease in aggregate demand will likely cause an increase in a trade deficit. D An increase in a trade surplus will likely cause a decrease in GDP.

A

The creation of a quota on Canadian softwood lumber sold in the U.S. may affect prices and quantities of Canadian softwood lumber sold in the U.S. and the prices and quantities of U.S. softwood lumber sold in the U.S. Assuming that the quota is set at a level lower than the current level of imports, the resulting equilibrium price paid by consumers in the imported Canadian softwood lumber market will ______________. A) Rise B) Fall C) Not change D) May rise or fall

A

Ways the U.S. can reduce its current account deficit include the following, except: A Reduce exports to international countries by eliminating free trade agreements B Manipulate the exchange rate to make U.S. exports appear cheaper to people and businesses abroad and imports more expensive to U.S. consumers C Encourage U.S. consumers to switch from international products to U.S.-made products D Increase interest rates with a contractionary monetary policy to discourage spending on goods and services by U.S. consumers

A

Which event would cause the dollar to appreciate against the euro, if everything else remains the same? A An increase in interest rates in the U.S. B An increase in interest rates in Europe C A decline in interest rates in the U.S. D A decline in prices in Europe

A

Which of the following groups would prefer monetary policy to ameliorate a recession, as opposed to fiscal policy? A) Borrowers B) Lenders

A

Which of the following would weaken the argument for the use of discretionary monetary policy? A) The term length for Fed board members is shortened from 14 years to 2 years. B) The accuracy of forecasts is improved through new computer techniques. C) Congress requires a balanced budget at all times. D) The velocity of money varies greatly over time.

A

Which term best describes the real exchange rate? Multiple answers: You can select more than one option A The rate at which countries' goods trade against each other B The value of one currency in terms of how much it can buy of another currency C The nominal exchange rate times the ratio of the domestic price level to the foreign price level

A

A country may try to fix its exchange rate in order to do which of the following? Multiple answers: You can select more than one option A Prevent large swings in the demand for its exports B Reduce uncertainty for businesses involved in international trade C Maintain an independent monetary policy

A, B

Which of the following could be true? Multiple answers: You can select more than one option A) The federal budget deficit increases while interest rates fall. B) The deficit is larger during a recession. C) The deficit gets larger while inflation increases. D) None of the above

A, B, C

Which of the following enables a country to fix its currency to another currency? Multiple answers: You can select more than one option A Buying domestic currency or selling foreign currency to assure a stable exchange rate B Buying and selling foreign government bonds to assure a stable exchange rate C Selling domestic currency or buying foreign currency to assure a stable exchange rate

A, B, C

An increase in the world's perception of the U.S. as a good, safe place to invest causes which of the following? Multiple answers: You can select more than one option A A surplus in the financial account due to a rise in demand for financial assets B A surplus in the current account due to a rise in demand for financial assets C A decline in the current account as the trade deficit widens D A surplus in the current account as the trade deficit narrows

A, C

A strong dollar increases ______________ and reduces ______________. A Exports; imports B Imports; exports C Imports; imports D Exports; exports

B

An increase in investment by Americans in Canada will have which of the following immediate effects? A An increase in the U.S. financial account surplus B A decrease in the U.S. financial account surplus C An increase in the U.S. financial account deficit D A decrease in the U.S. financial account deficit E An increase in the U.S. current account deficit

B

An increase in the British demand for U.S.-produced products will have which of the following effects on the value of the dollar and the equilibrium quantity of dollars in the international exchange markets? A An increase in the value of the dollar and a decrease in the equilibrium quantity of U.S. dollars in international markets B An increase in the value of the dollar and an increase in the equilibrium quantity C A decrease in the value of the dollar and an increase in the equilibrium quantity D A decrease in the value of the dollar and a decrease in the equilibrium quantity

B

Consider the following quote: "Over one and a half million people were laid off from jobs following the doubling of oil prices in 1979." What was the policy dilemma faced by monetary and fiscal policy makers? A) Rising prices and falling unemployment B) Rising prices and rising unemployment C) Rising prices and rising interest rates D) Rising prices and increased consumer confidence

B

If U.S. purchases of imports are greater than international purchases of our exports, it is likely that we have a current account: A Deficit and a financial account deficit B Deficit and a financial account surplus C Surplus and a financial account deficit D Surplus and a financial account surplus

B

If an economy appears to be growing rapidly and inflation appears to be becoming a serious problem, which of the following fiscal policies would be appropriate? A) A decrease in capital gains taxes B) A decrease in government spending C) A reduction in personal income taxes D) An increase in government transfer payments

B

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for A) selling government securities, raising the reserve ratio, lowering the discount rate, increasing interest paid on reserves held at Fed banks, and a budgetary surplus. B) buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit. C) buying government securities, raising the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary surplus. D) buying government securities, reducing the reserve ratio, raising the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit.

B

In a two-nation world, comparative advantage in the production of a particular product means that one nation can produce A) the product with fewer inputs than the other nation. B) the product at a lower domestic opportunity cost than the other nation. C) more of the product than the other nation. D) the product at lower average cost than the other nation.

B

Once decisions have been made to use monetary policy and fiscal policy to solve a problem, it will take less time for monetary policy to have an effect on real GDP and the price level than would an increase in government spending. A) True B) False

B

Specialization and trade based on comparative advantage between individuals or between nations leads to A greater self-sufficiency B higher total output C higher product prices D higher utilization of resources

B

What are the twin deficits? A The notion that a rising fiscal deficit causes interest rates to fall, increasing the trade deficit B The notion that a rising fiscal deficit causes interest rates to rise, increasing the trade deficit C The notion that a rising trade deficit causes interest rates to fall, increasing the fiscal deficit D The notion that a rising trade deficit causes interest rates to rise, increasing the trade deficit

B

Which event would cause the dollar to depreciate against the peso if everything else remains the same? A An increase in prices in Mexico B An increase in prices in the U.S. C Expansionary monetary policy in Mexico D An increase in interest rates in the U.S.

B

Which of the following statements comparing the lags of monetary and fiscal policy is accurate? A) The lag between the initiation of fiscal policy and the effect on real GDP is longer than the lag between the initiation of monetary policy and its effects. B) The policy-making lag for fiscal policy is longer than monetary policy. C) Monetary policy takes longer to have an effect on the economy if the economy is growing than if the economy is entering a recession. D) The total amount of time from beginning to end for fiscal policy is significantly shorter than for monetary policy.

B

If investment opportunities improve in Europe relative to the U.S., what would we expect to happen? Multiple answers: You can select more than one option A A nominal appreciation in the dollar B The nominal value of the dollar to depreciate C A nominal depreciation of the euro D The nominal value of the euro to appreciate

B, D

A major goal of the WTO (World Trade Organization) is to A) increase the protection of producers against foreign trade competition. B) encourage bilateral trade agreements between nations. C) liberalize international trade among nations. D) maximize tariff revenue for governments.

C

All of the following explain why the U.S. trade deficit with Germany would expand, except ______________. A Increased preferences for German products B Increased value of the dollar C Increased interest rates in Europe D Increase in prices in the U.S.

C

An economy is producing at a level of output that is equal to the full-employment level of output. Prices of a fundamental resource, such as oil, decrease significantly. What would be the best monetary policy? A) stimulative policy B) restrictive policy C) No monetary policy would be required. D) There is no obviously correct policy, unless you can specify your goals.

C

An increase in government spending will cause the demand for money to ______________, then interest rates to ______________, which in turn causes investment spending to ______________. A) Decrease, decrease, increase B) Increase, decrease, increase C) Increase, increase, decrease D) Decrease, increase, increase

C

An increase in inflation in the rest of the world, combined with no change in inflation in the U.S., will cause which of the following changes in the international value of the dollar and why (focus on the effects on U.S. imports)? A An increase in the value of the dollar because U.S. imports would increase B A decrease in the value of the dollar because U.S. imports would increase C An increase in the value of the dollar because U.S. imports would decrease D A decrease in the value of the dollar because U.S. imports would decrease E No change in the value of the dollar because only changes in interest rates will cause changes in the value of the dollar

C

An inflow of investment funds into the United States from overseas is likely to result from a(n) A) decline in expectations for economic growth in the United States. B) growing belief among investors that the U.S. dollar ($) is overvalued. C) rise in U.S. interest rates relative to world interest rates. D) increase in the U.S. inflation rate.

C

Assume that we are currently producing less than the potential level of GDP. Which of the following is a valid argument for active use of monetary policy instead of fiscal policy? A) Fiscal policy is not effective in stimulating aggregate demand B) Monetary policy stimulates aggregate supply C) Fiscal policy may cause crowding out of investment D) Fiscal policy will lead to lower interest rates

C

Expansionary fiscal policy at full employment output will likely cause a(n) ______________ in investment and a(n) ______________ in net exports in the long run. A Increase; decrease B Increase; increase C Decrease; decrease D Decrease; increase

C

Expansionary fiscal policy will cause which of the following? A) An increase in investment, if real GDP is already above the potential level B) A decrease in investment, if real GDP is significantly below the level of potential real GDP C) A rise in interest rates D) A decrease in the money supply

C

If a nation imposes a tariff on an imported product, then the nation will experience a(n) A) decrease in supply of, and an increase in demand for, the product. B) decrease in demand and a decrease in the price of the product. C) decrease in total supply and an increase in the price of the product. D) increase in supply of, and a decrease in demand for, the product.

C

If international governments and businesses make more real and financial investments in the U.S. than U.S. governments and businesses make abroad, it is likely that we have a financial account: A Deficit and a current account deficit B Deficit and a current account surplus C Surplus and a current account deficit D Surplus and a current account surplus

C

In Canada, one worker can produce either one bushel of wheat or one beer mug. In China, one worker can produce either two bushels of wheat or three beer mugs. Who has the comparative advantage in each good? A) China in both goods. B) China in wheat and Canada in mugs. C) Canada in wheat and China in mugs. D) Canada in both goods.

C

Indicate where, if at all, the following should appear in the balance of payments: A Korean company builds a new factory in the U.S. A Import of an asset, financial account, in subcategory, U.S. owned assets abroad B Import of a service, financial account, in subcategory, internationally owned assets in the U.S. C Export of an asset, financial account, in subcategory, internationally owned assets in the U.S. D Export of a service, financial account

C

Indicate where, if at all, the following should appear in the balance of payments: the U.S. government sells U.S. government bonds to the Chinese government. A Import of an asset, financial account, in subcategory, U.S.-owned assets abroad B Import of a service, financial account C Export of an asset, financial account, in subcategory, Internationally owned assets in the U.S. D Export of a service, financial account

C

Monetary policy is thought to be A) equally effective in moving the economy out of a depression as in controlling demand-pull inflation. B) more effective in moving the economy out of a depression than in controlling demand-pull inflation. C) more effective in controlling demand-pull inflation than in moving the economy out of a recession. D) only effective in moving the economy out of a depression.

C

The effectiveness of monetary policy is limited by the slope of A) the demand for money function. B) the investment demand function. C) both the money and investment demand functions. D) neither the money nor investment demand functions.

C

The increased-domestic-employment argument for tariff protection holds that A an increase in tariffs will reduce net exports and stimulate domestic employment. B domestic inflation is a desirable policy goal because it stimulates exports. C an increase in tariffs will increase net exports and stimulate domestic employment. D domestic deflation is a desirable policy goal because it stimulates imports.

C

What other economic process needs to accompany international trade, for nations to benefit from such trade? A nationalization of industries B regulation of production and trade C specialization in production D spreading out of resources in more industries E all of the above.

C

When the balance of trade is in deficit, which of the following is inaccurate? A We imported more than we exported. B We sent more money abroad than we received back from people in other countries. C This means that net exports are positive. D The financial account is in a surplus.

C

Which of the following best describes the immediate effect of an increase in U.S. tariffs on goods and services manufactured abroad? The balance of trade: A Surplus will decrease B Surplus will increase C Deficit will decrease D Deficit will increase E Will not change

C

Which of the following will likely cause the U.S. dollar to increase in value relative to other currencies? A Higher taxes B Lower interest rates C Increased government spending D Higher U.S. prices

C

A temporary income tax cut will be ______________ effective as a fiscal policy than a permanent change because ______________. A) More; because the government deficit will not increase by as much as it will if the tax cut is permanent B) More; because future income is not affected C) Less; because the government deficit will increase by more than it will if the tax cut is permanent D) Less; because future income is not affected

D

Contractionary monetary policy will likely be accompanied by a(n) ______________ in interest rates and that change in interest rates will cause a(n) ______________ in the value of the dollar. A Decrease; decrease B Increase; decrease C Decrease; increase D Increase; increase

D

In terms of absolute dollar volume, the top 3 leaders in world exports are, in order: A) Japan, China, and the European Union. B) the United States, England, and Canada. C) Germany, England, and the United States. D) China, Germany, and the United States.

D

The current account contains all of the following except: A Exports and imports of goods and services B Unilateral transfers paid and received C Investment income paid and received D Purchases of stocks of businesses abroad by U.S. residents

D

Trade protection in the form of tariffs and import quotas would benefit the following groups, except A the government of the importing country. B workers in domestic firms producing the product. C domestic producers of the product. D consumers of the product.

D

What do people and businesses abroad do with all the money U.S. residents send them in exchange for the goods and services we import? All of these except for: A Buy U.S. stocks and bonds B Build factories in the U.S. C Buy U.S. real estate D Sell their international government bonds to U.S.

D

What does it mean when the current account is in a deficit? All of the following except: A People and businesses abroad prefer to keep their saving in the U.S. since they think it will earn a higher return B U.S. is importing more goods & services than exporting, net investment income is negative, and net unilateral transfers are negative C U.S. trade balance is negative and is not offset by the net investment income received and net unilateral transfers received D People and businesses abroad have lots of confidence in the future growth of their own economies. E People and businesses abroad are skeptical about their economy and its future potential

D

Which of the following accurately refers to "crowding in"? A) Increased consumption in response to increased government spending B) Increased investment in response to expansionary monetary policy C) Increased consumption in response to contractionary fiscal policy D) Increased investment in response to expansionary fiscal policy.

D

Which of the following explains why purchasing power parity does not hold? A Not all goods are traded. B Shipping costs could explain differences in exchange rates. C There may be import taxes or restrictions which alter prices. D All of the above are reasons why purchasing power parity does not hold.

D

The benefit of the current account deficit involves all of the following except: A We have the ability to invest more in our domestic economy than we save as a country B Being able to borrow from people and businesses abroad gives us the ability to invest in more research and development that can increase our productivity C People and businesses abroad can find a productive use for their savings, that is, savings moving to where it earns the highest returns D If our economy is growing faster as a result of using the loans to increase our productive capacity, then the loans are becoming smaller over time and will be less of a burden to repay. E We end up investing too little in our U.S. domestic economy using the loans from the people and businesses abroad

E

The major reason(s) for the current US trade deficit with China is A the high world demand for the dollar. B the low value of the yuan. C the current economic growth of the U.S. D the per capital US GDP. E all of the above.

E

When the U.S. economy has a current account deficit, all of the following may be true except: A It is a good sign since people and businesses abroad prefer to keep their extra saving in the U.S. rather than invest it in their domestic economy B It is a good sign since people and businesses abroad believe they can earn higher return if they keep their saving in the U.S C It is a good sign since it signals a strong potential about the productivity in the U.S. economy D It is a bad sign since people and businesses abroad have lost confidence in the future growth of their economy E It is a bad sign since people and businesses abroad are skeptical about the U.S. economy and its potential in the future

E

Which of the following best describes the relationship between the current account and the financial account balances? A If the financial account is in surplus, the current account must be in surplus. B If the financial account is in a deficit, the current account must be in a deficit. C There is no direct relationship between the current account and financial account. D The balance on the financial account will always equal the balance on the current account. E If the financial account has a deficit, then the current account must have a surplus.

E

Which of the following events would strengthen the argument for the use of monetary policy and weaken the argument for the use of fiscal policy? I. Investment spending becomes more sensitive to changes in interest rates. II. A balanced budget amendment is passed and made effective. III. International trade and financial flows become a more important part of the U.S. economy. A I only B II only C I and II only D II and III only E I, II, and III

E

increase in US demand for chinese goods has what effect on the yuan

appreciate

An individual can produce a good using fewer resources than another individual.

absolute advantage

adam smith

absolute advantage

why do countries trade?

cannot produce a good or cannot produce it as efficiently

An individual can produce a good at a lower opportunity cost than another individual.

comparative advantage

exogenous factors of the exchange rate demand function

demand for chinese goods, US income, US inflation, interest rate, rate of return of FDI in china

increase in US interest rate has what effect on the yuan

depreciate

monetary policy reversability

easily reversible

what are the main components of the capital and financial account

net transfer of business ownership, debt reduction, sale of financial assets

fiscal policy reversability

not easily reversible

why is fiscal policy less effective in inflation

not politically easy

fiscal policy is more effective in

recession

what is balance of payment

record of all international transactions

pros of flexible exchange rate regime

self-regulating deficit, no need for central bank intervention, control over the money supply

effectiveness lag for fiscal policy

short

implementation lag for monetary policy

short

two reasons fiscal policy is more effective in recession

short effectiveness lag and benefits to both the employed and unemployed

why can the US sustain a trade deficit

strong currency and global dominance

why do countries have comparative advantages

technological differences, skills, resources or educations