chapter 9 and 10
The effect of China's choice of exchange rate regime is _______.
an increase in U.S. dollar reserves when China's target rate is above the equilibrium exchange rate and a decrease in U.S. dollar reserves when China's target rate is below the equilibrium exchange rate
Examples of fiscal policy that increase aggregate demand include ______.
an increase in government expenditure, a decrease in taxes, and an increase in transfer payments
If saving is $850 billion, investment is $500 billion, government expenditure on goods and services is $600 billion and net exports is $100 billion, then calculate private sector balance.
$350 billion
You can purchase a laptop in Mexico City for 12,960 Mexican pesos. If the exchange rate is 18 Mexican pesos per U.S. dollar and if purchasing power parity prevails, at what price can you buy an identical computer in Dallas, Texas? You can buy an identical computer in Dallas, Texas for
$720
The price level in the Eurozone is 110.5, the price level in the United States is 120.5, and the nominal exchange rate is 0.78 euros per U.S. dollar. The real exchange rate expressed as Eurozone real GDP per unit of U.S. real GDP was
.85
If the US interest rate is 1.5 per cent, Canada's interest rate is 1 per cent, the US inflation rate is 1.2 per cent and Canada's inflation rate is 0.70 per cent, then calculate the US interest rate differential.
0.5 per cent
Choose the correct statements. 1. The foreign exchange market is made up of thousands of people, including international tourists and foreign exchange brokers. 2. Foreign currency is the money of other countries. 3. Foreign currency is always in the form of notes or coins. 4. The foreign exchange market is a place.
1 and 2
The following events have occurred at times in the history of the United States: 1. A deep recession hits the world economy 2. The world oil price rises sharply 3. U.S. businesses expect future profits to fall
1.decreases aggregate demand; 2. decreases short-run aggregate supply 3. decreases aggregate demand
Choose the statement about a crawling peg that is correct. A. A crawling peg makes the exchange rate fluctuate wildly. B. A crawling peg is not influenced by actions of the central bank. C. When China abandoned its fixed exchange rate, it replaced it with a crawling peg. Your answer is correct. D. The Fed operated a crawling peg in the decade following World War II.
C
Choose the correct statement about interest rate parity. A. Interest rate parity means that interest rates in the world's major economies are the same. B. If a higher interest rate is available in Tokyo than in New York, the demand for U.S. dollars increases. C. Interest rate parity implies that $100 U.S. can buy the same quantity of goods and services in D. Interest rate parity means that for risk-free transactions, there is no gain from choosing one currency over another
D. Interest rate parity means that for risk-free transactions, there is no gain from choosing one currency over another
With an expected break in the link of the crown and the euro _______.
Denmark has a fixed exchange rate policy; people will expect the crown to appreciate, so they will sell euros and buy crowns and the crown will appreciate immediately
What makes an exchange rate hard to predict?
Influences of expectations and the constant arrival of news about the influences on supply and demand, make day-to-day and week-to-week changes in the exchange rate difficult to predict.
Based on this news clip, Paul Krugman most likely follows the ______ school of thought and Ben Bernanke most likely follows the ______ school of thought.
Keynesian or new Keynesian; Keynesian or new Keynesian
Based on this news clip, Barack Obama most likely follows the ______ school of thought and John McCain most likely follows the ______ school of thought.
Keynesian or new Keynesian; classical or new classical
Treasury Secretary Timothy Geithner most likely follows the _______.
Keynesian school of thought if he is recommending an active policy of tax cuts to combat the recession
Which of the following statements illustrate monetary policy?
The Fed has raised the federal funds rate by 0.3 percent.
Which of the following statements illustrate fiscal policy?
The US government has proposed a hike in the corporate tax rate.
Economic growth results from ______.
a growing supply of labor and increasing labor productivity, which increase long-run aggregate supply
A rise in the money wage rate with no change in potential GDP creates ______.
a leftward shift of the SAS curve and no change in the LAS curve
The United States is ______.
a net borrower and a debtor nation
Inflation results from ______.
a persistent increase in aggregate demand at a faster pace than that of the increase in long-run aggregate supply
A macroeconomic equilibrium in which real GDP exceeds potential GDP is _____ equilibrium. And one in which real GDP is less than potential GDP is _____ equilibrium.
an above full-employment a below full-employment
A monetarist is a macroeconomist who believes that the economy is self-regulating and that it will normally operate _____, provided that monetary policy is not erratic and that the pace of _____ is kept steady.
at full employment; money growth
The ______ account records ______ U.S. investment abroad.
capital and financial; foreign investment in the United States minus
The debtor nation status of the United States would be a concern if the borrowed funds were used to finance ______.
consumption
China makes its choice of exchange rate regimes to _______.
control its inflation
If the government sector deficit increases, with no change in the private sector surplus, net exports ______.
decrease
A fall in the expected future exchange rate ______ the demand for U.S. dollars. A decrease in the U.S. demand for imports _______ the demand for U.S. dollars.
decrease; does not change
When Mexico decreases the quantity of money, Mexico's aggregate demand ______.
decreases and its AD curve shifts leftward
The Fed cuts the quantity of money and all other things remain the same. In the short run, aggregate demand _______.
decreases because interest rates rise and it is it more difficult to get a loan to buy homes and large consumer goods
A rise in wages in China _______ .
decreases China's short-run aggregate supply and the quantity of real GDP supplied does not change
In the long run, the real exchange rate is determined by ______ and the nominal exchange rate is determined by ______.
demand and supply in the markets for goods and services; the quantities of money in two countries
A flexible exchange rate is an exchange rate that is determined by ______ in the foreign exchange market with no direct intervention by the _____.
demand and supply; central bank
If the price level and the money wage rate rise by the same percentage, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
does not change; long run
Interest rate parity is __________. When this condition does not hold _______.
equal rates of return across currencies; traders take actions within seconds that drive the exchange rate back to its interest rate parity level
Interest rate parity, which means _____ across currencies, means that for risk free transactions, there is _____ gain from choosing one currency over another.
equal rates of return; no
Purchasing power parity is _______.
equal value of money
In the 1950s and 1960s, the United States operated a ______. Now the United States operates a ______.
fixed exchange rate; flexible exchange rate
A crawling peg exchange rate policy is one that _______. A crawling peg exchange rate is achieved _______.
follows a path determined by a decision of the government or the central bank; by central bank intervention in the foreign exchange market
The market in which the currency of one country is exchanged for the currency of another country is the ______. The price at which one currency exchanges for another currency is the ______.
foreign exchange market; exchange rate
The official settlements account records the change in U.S. official reserves, which are the government's holdings of ______. If U.S. official reserves increase/decrease, the official settlements account balance is ______.
foreign currency; negative/positive
An increase in world demand for U.S. exports ______ the demand for U.S. dollars. A rise in the U.S. interest rate differential ______ the demand for U.S. dollars
increase; increase
The quantity of U.S. dollars that people planned to sell in the foreign exchange market _______.
increased
Starting from a full-employment equilibrium, an increase in aggregate demand ______, and creates ______ gap.
increases real GDP above potential GDP; an inflationary
If the price level rises and the money wage rate remains constant, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
increases; short run
The imports effect of the rise in the exchange rate is that the value of U.S. imports _______, and in the foreign exchange market, _______.
increases; the quantity of U.S. dollars supplied
A flexible exchange rate is one that _______. It works _______.
is determined by demand and supply in the foreign exchange market; with no direct intervention by the central bank
A fixed exchange rate is one that _______. A fixed exchange rate is achieved _______.
is set by the government or the central bank; by central bank intervention in the foreign exchange market
The imports effect is the result that the higher the exchange rate, other things remaining the same, the ______.
lower are the prices of foreign-produced goods and services to Americans and the greater is the volume of U.S. imports
Long-run aggregate supply is the relationship between the quantity of real GDP supplied and the price level when the _____ changes in step with the price level to maintain full employment.
money wage rate
Foreign currency is the money _____ regardless of whether that money is in the form of notes, coins, or bank deposits.
of other countries
The aggregate demand curve slopes downward because _______.
of the wealth
The U.S. dollar exchange rate fluctuates in part because a change in the U.S. interest rate differential changes the demand for U.S. dollars and the supply of U.S. dollars in ______ and a change in the expected future exchange rate changes the demand for U.S. dollars and the supply of U.S. dollars in ______.
opposite directions; opposite directions
Keynesian macroeconomists recommend ______.
policies that actively offset changes in aggregate demand that bring recession
Monetarist macroeconomists recommend ______.
policies that keep taxes low to avoid disincentive effects that decrease potential GDP
Classical macroeconomists recommend ______.
policies that minimize the disincentive effects of taxes on employment, investment, and technological change
An exchange rate is the _____ at which one currency exchanges for another in the foreign exchange market.
price
The Fed "counters disorderly conditions in exchange markets" by _______.
purchasing foreign reserves, which lowers the U.S. exchange rate when the demand for dollars dramatically increases
If a shortage of U.S. dollars occurs in the foreign exchange market, the _______ and the exchange rate _______.
quantity of U.S. dollars demanded decreases and the quantity of U.S. dollars supplied increases; rises
If a surplus of U.S. dollars occurs in the foreign exchange market, the _______ and the exchange rate _______.
quantity of U.S. dollars demanded increases and the quantity of U.S. dollars supplied decreases; falls
The defining feature of the Keynesian view of macroeconomics is that the economy is ______.
rarely at full employment
Aggregate demand is the relationship between the quantity of _____ demanded and the _____ when all other influences on expenditure plans remain the same.
real GDP; price level
Short-run aggregate supply is the relationship between the quantity of _____ supplied and the _____ when the money wage rate, the prices of other resources, and potential GDP remain constant.
real GDP; price level
Given the information above, for a given expected future exchange rate, the expected profit from holding U.S. dollars is _______.
smaller in November 2016 than in November 2015
It is expected that in the future the exchange rate will ______. The interest rate differential is ______.
rise; negative
To preserve purchasing power parity, the exchange rate ______. If investment from foreigners increases due to the rapid economic growth, the current account balance is becoming more ______.
rises; negative
The central bank of Denmark must _______.
sell crowns and buy euros
The quantity of U.S. dollars demanded is ______ in November 2016 than in November 2015. And the quantity of U.S. dollars supplied is ______ in November 2015 than in November 2016.
smaller; smaller
If a U.K. bank deposit earns 4 percent a year and a U.S. bank deposit earns 5 percent a year, then people expect that ______.
the U.S. dollar will depreciate by 1 percent a year
A currency can experience short-run fluctuations because ______. The Fed counters the short-run fluctuations by _________.
the currency can fluctuate based on beliefs about the future exchange rate; buying and selling U.S. dollars and foreign exchange
In the short run, the nominal exchange rate is determined by ______. And in the short run ______.
the demand for U.S. dollars and the supply of U.S. dollars in the foreign exchange market; a change in the nominal exchange rate brings an equivalent change in the real exchange rate
The main influences on the supply of U.S. dollars in the foreign exchange market include ______.
the exchange rate, U.S. demand for imports, interest rates in the United States and other countries, and the expected future exchange rate
The main influences on the demand for U.S. dollars in the foreign exchange market include ______.
the exchange rate, world demand for U.S. exports, interest rates in the United States and other countries, and the expected future exchange rate
Arbitrage in the foreign exchange market achieves _______.
the law of one price, no round-trip profit, interest rate parity, and purchasing power parity
Arbitrage is _______.
the practice of seeking to profit by buying in one market and selling for a higher price in another related market
The aggregate demand curve shows the relationship between the quantity of real GDP demanded and ______ when everything else remains the same.
the price level
A movement along the aggregate demand curve occurs if _______.
the price level changes and all other factors remain unchanged
The equilibrium exchange rate is the exchange rate at which _______.
the quantity of dollars demanded equals the quantity of dollars supplied
When the price level in Mexico falls, _______.
the quantity of real GDP demanded in Mexico increases
The foreign exchange market is the market in which _____ of one country is exchanged for _____ of another.
the currency; the currency
A current account deficit "must be financed by capital inflows" because _______.
to pay for the U.S. current account deficit, the United States must either borrow more from abroad than we lend abroad or use U.S. official reserves
Net exports equals ______.
(T−G) + (S − I)
When the U.S. economy goes into a recession, ______.
Mexico's exports to the United States decrease, Mexico's aggregate demand decreases, and Mexico's AD curve shifts
The real exchange rate is the relative price of _____ to _____.
US-produced goods and services; foreign-produced goods and services
Between June 2009 and June 2010, the U.S. dollar ______ against the Canadian dollar. Between January 2009 and January 2010, the U.S. dollar ______ against the euro.
appreciated; depreciated
Between June 2011 and June 2012, the U.S. dollar ______ against the Canadian dollar. Between June 2011 and June 2012, the U.S. dollar ______ against the Japanese yen.
appreciated; depreciated
Arbitrage is the practice of seeking to profit by _____ in one market and _____ in another related market.
buying; selling for a higher price
The ______ account records receipts from exports of goods and services sold abroad, payments for imports of goods and services from abroad, and ______.
current; net interest income paid abroad and net transfers
Aggregate demand _______ when a decrease in foreign income occurs. Aggregate demand _______ when an increase in government expenditures occurs.
decreases; increases
Net exports is _____ of goods and services minus _____ of goods and services.
exports; imports
Suppose that purchasing power parity does not hold. If all (or most) prices have increased in the United States and not increased in Japan, then people will generally expect that the foreign exchange value of the dollar will ______. The demand for dollars ______.
fall; decreases and the supply of dollars increases
Between 1997 and 2005, China operated a _______ exchange rate. Since 2005, China has operated a _________ exchange rate.
fixed; crawling peg
Starting from a full-employment equilibrium, a decrease in short-run aggregate supply ______ the price level and ______ potential GDP.
increases; decreases real GDP below
A rise in expenditure by millennials ______ real GDP and ______ the price level in the short run.
increases; increases
If potential GDP increases, what happens to aggregate supply? When potential GDP increases, ______.
long-run aggregate supply and short-run aggregate supply increase. The LAS and the SAS curve shift rightward
Purchasing power parity is equal value of _____ - a situation in which _____ buys the same amount of goods and services in different currencies.
money; money
In the long run, the money wage rate ______, short-run aggregate supply ______, and the economy returns to a full-employment equilibrium.
rises; decreases
The defining feature of the classical view of macroeconomics is that the economy is ______.
self-regulating and always at full employment
The defining feature of the monetarist view of macroeconomics is that the economy is______.
self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady
When fuel prices rise _______. When the price level in India increases _______
short-run aggregate supply decreases; the quantity of real GDP supplied increases
Explain what will happen if the expectation of rising prices in New York and falling prices in London becomes widespread. Might expectations become self-fulfilling? The expectations _______ become self-fulfilling because _______.
will; to maximize profit, investors increase demand for New York properties, which raises price, and increase supply of London properties, which decreases price
