ECON 2105: Chapter 19 (Practice Questions)

If an economy's MPC is 0.95 and the MPM is 0.05, then an increase in government spending of $1,000 will increase income by

$10,000

Refer to Figure 19.2. The dollar is currently at Point A. An increase in income in the United States causes a movement to Point

D

Fiscal policies are

less effective when the exchange rate is flexible and the economy is open

Suppose the exchange rate between the United States and Japan changed from $1 = 150 yen to $1 = 140 yen, which of the following statements is true?

the dollar depreciated

The value of the dollar relative to the euro would decrease if

the supply of dollars increases and the demand for euros increases

Economic activity increases in Western Europe, and this causes economic activity to increase in the United States. This is an example of

the trade feedback effect

Floating exchange rates are determined by

the unregulated forces of supply and demand

If planned aggregate expenditures are $400 billion, consumption is $120 billion, investment is $60 billion, government spending $70 billion, there is a

trade surplus of $150 billion

Why does the depreciation of a country's currency tend to increase its price level?

a currency depreciation makes imported inputs more expensive

Refer to Figure 19.4. The demand and supply of pounds are S2 and D2. Which of the following can change the equilibrium exchange rate ($/pound) to $2.50 and the equilibrium quantity to 400 pounds?

an increase in income in the United States

Which of the following decreases the price of the dollar relative to the British pound?

an increase in the supply of dollars

The price of one country's currency in terms of another country's currency is the

exchange rate

A Big Mac cost $3 in the United States and 50 pesos in Mexico. The purchasing power parity theory would predict that the exchange rate in the long run is

$1 = 16.67 pesos

Suppose a U.S. based company decides to build a new factory in Canada instead of the U.S. What impact will this have in Canada's economy?

Investment expenditures in Canada and Canada's GDP will both rise

The United States and Mexico have significant trade with each other. Which of the following is true?

Mexican prices decrease, Mexican exports increase, U.S. prices decrease

_____ suggests that the depreciation of a nation's currency may have an ambiguous effect on its balance of trade

The J-curve effect

When the U.S. central bank, the Federal Reserve, increases the supply of money:

U.S. interest rates fall which cause the U.S. dollar to depreciate against other currencies

If the Fed increases the money supply to fight recession, a floating exchange rate will aid the Fed in fighting recession because

as the money supply is increased, the interest rate will decrease, and the price of U.S. exports will fall and the price of U.S. imports will rise

The record of a country's transactions in goods, services, and assets with the rest of the world it its

balance of payments

Imports

cause foreign exchange to leave the country, and thus they are registered as debit in the balance of payments

The balance of payments in divided into two major accounts, the

current account and financial account

The open-economy multiplier ______ the close-economy multiplier

is smaller than