International Macro exam 2 CH 17, 18, 19, 20

Alan Auerbach and Yuriy Gorodnichenko of the University of​ California, Berkeley, analyzed data from mostly wealthy OECD member countries and found that for economies in​ recession, the multiplier is about

2

Which of the following statements is​ TRUE?

A rise in EP*/P makes domestic goods and services cheaper relative to foreign goods and services and shifts both domestic and foreign spending from foreign goods to domestic goods.

Which one of the following statements is the most​ accurate? Question content area bottom Part 1 A. An increase in disposable income improves the current account. B. An increase in income improves the current account. C. An increase in disposable income does not affect the current account. D. An increase in income worsens the current account. E. An increase in disposable income worsens the current account.

An increase in disposable income worsens the current account.

If the​ economy's output is initially above full​ employment, which of the following policy combinations could restore full employment and keep the exchange rate at the same​ level?

Contractionary monetary and fiscal policy.

At the end of the Bretton Woods​ system, what combination of policies would have maintained the​ system?

Contractionary monetary policy in the US and expansionary policy abroad.

Which one of the following statements is​ true? Question content area bottom Part 1 A. Countries with weak investment opportunities should invest more at home. B. Countries with weak investment opportunities should invest little abroad. C. Countries with weak investment opportunities should invest little abroad and channel their savings into more productive investment activity domestically. D. Countries with strong investment opportunities should invest little at home and channel their savings into more productive investment activity abroad. E. Countries with weak investment opportunities should invest little at home and channel their savings into more productive investment activity abroad.

Countries with weak investment opportunities should invest little at home and channel their savings into more productive investment activity abroad.

Which one of the following statements is the most​ accurate? Question content area bottom Part 1 A. Depreciation is a decrease in E when the exchange rate floats while devaluation is a rise in E when the exchange rate is fixed. B. Depreciation is a rise in E when the exchange rate floats while devaluation is a decrease in E when the exchange rate is fixed. C. Depreciation is a rise in E when the exchange rate is fixed while devaluation is a rise in E when the exchange rate floats. D. Depreciation is a rise in E when the exchange rate floats while devaluation is a rise in E when the exchange rate is fixed. Your answer is correct. E. None of the above.

Depreciation is a rise in E when the exchange rate floats while devaluation is a rise in E when the exchange rate is fixed.

Under fixed exchange​ rates, which one of the following statements is the MOST​ accurate?

Devaluation causes a rise in output.

Which one of the following statements is the most​ accurate? Question content area bottom Part 1 A. Fiscal policy has the same effect on output under fixed and flexible exchange rate regimes. B. Fiscal policy affects output more under fixed than under flexible exchange rate regimes. Your answer is correct. C. Fiscal policy cannot affect output under fixed exchange rate but does affect output under flexible exchange rate regimes. D. Fiscal policy affects output less under fixed than under flexible exchange rate regimes. E. Fiscal policy can affect output under fixed exchange rate but does not affect output under flexible exchange rate regimes.

Fiscal policy affects output more under fixed than under flexible exchange rate regimes.

Which one of the following statements is the most​ accurate? Question content area bottom Part 1 A. For asset markets to remain in​ equilibrium, a rise in domestic output must be accompanied by a depreciation of domestic​ currency, all else equal. B. For asset markets to remain in​ equilibrium, a fall in domestic output must be accompanied by an appreciation of foreign​ currency, all else equal. C. For asset markets to remain in​ equilibrium, a fall in domestic output must be accompanied by a depreciation of foreign​ currency, all else equal. D. For asset markets to remain in​ equilibrium, a rise in domestic output must be accompanied by an appreciation of domestic​ currency, all else equal. Your answer is correct. E. For asset markets to remain in​ equilibrium, a fall in domestic output must be accompanied by an appreciation of domestic​ currency, all else equal.

For asset markets to remain in​ equilibrium, a rise in domestic output must be accompanied by an appreciation of domestic​ currency, all else equal.

Under the price−specie−flow ​mechanism, what happens​ when, say, Great​ Britain's current account surplus is greater than its non−reserve financial account​ balance?

Gold reserves will flow into Great Britain.

Which of the following statements is​ TRUE? Question content area bottom Part 1 A. Governments continued with the gold standard during World War I and used gold to finance their massive military expenditures. B. Governments effectively suspended the gold standard during World War I and financed part of their massive military expenditures by borrowing money from other countries. C. Governments continued with the gold standard during World War I and increased gold reserves to finance the reconstruction process. D. Governments effectively suspended the gold standard during World War I and financed part of their massive military expenditures by printing money.

Governments effectively suspended the gold standard during World War I and financed part of their massive military expenditures by printing money.

In the short​ run, with prices​ fixed, how would an increase in government spending affect the DD−AA ​equilibrium?

It will increase output and appreciate the currency.

Which of the following is TRUE of the current account​ balance?

Monetary expansion increases the current account balance.

When domestic and foreign currency bonds are imperfect​ substitutes, the domestic interest rate​ (R) can be written as

R​ = R*​ + ​(Ee − ​E)/E + ρ.

The interest parity condition can be written as

R​ = R*​ + ​(Ee − ​E)/E.

Which of the following statements is​ TRUE? Question content area bottom Part 1 A. The gold standard allowed monetary policy to pursue internal policy​ goals, but did not allow high degrees of exchange rate stability and international financial capital mobility. B. The gold standard did not allow high degrees of exchange rate​ stability, international financial capital​ mobility, and monetary policy to pursue internal policy goals. C. The gold standard allowed high degrees of exchange rate stability and international financial capital​ mobility, but did not allow monetary policy to pursue internal policy goals. D. The gold standard allowed high degrees of exchange rate​ stability, international financial capital​ mobility, and monetary policy to pursue internal policy goals.

The gold standard allowed high degrees of exchange rate stability and international financial capital​ mobility, but did not allow monetary policy to pursue internal policy goals.

Which of the following is an example of an​ "unconventional monetary​ policy" by a central​ bank?

The purchase of specific categories of assets with new money.

Under a reserve currency ​standard, what would happen if all countries were trying to simultaneously increase their holdings of foreign bonds (assume they all are perfect substitutes) in their official​ reserves?

There will be no problem.

Why was the IMF​ created?

To manage the system of fixed exchange rates after World War II.

Between the end of World War II and​ 1973, the main reverse currency that almost every country pegged the exchange rate of its money was the

U.S. dollar.

The top four major currencies in​ countries' international reserve holdings include

U.S.​ dollar, euro, British​ pound, and Japanese yen.

Which of the following statements is​ TRUE? Question content area bottom Part 1 A. Under a gold​ standard, countries with limited gold reserves cannot participate. B. Under a gold​ standard, each country is not responsible for pegging its​ currency's price in terms of the official international reserve​ asset, gold. C. Under a gold​ standard, each country fixes the price of its currency in terms of gold by standing ready to trade domestic currency for gold whenever necessary to defend the official price. Your answer is correct. D. Under a gold​ standard, all countries set the same price of their currency in terms of gold.

Under a gold​ standard, each country fixes the price of its currency in terms of gold by standing ready to trade domestic currency for gold whenever necessary to defend the official price.

Why did world central banks need to continue to accumulate dollars in the Bretton Woods​ system?

World gold was not rising fast enough to satisfy reserves demand.

Disposable income is defined​ as:

Y−T

Until the Civil​ War, the United States had

a bimetallic monetary standard consisting of silver and gold.

To hold the exchange rate​ constant,

a central bank must always be willing to trade currencies at the fixed exchange rate with the private actors in the foreign exchange market.

Under a floating exchange rate​ regime, an increase in money demand will lead to

a decline in output that is larger than would be under a fixed exchange rate regime.

In order to bring about a real depreciation of the​ dollar, the U.S. can hope for

a rise in foreign price levels or a fall in the​ dollar's nominal value in terms of foreign currencies.

A balance of payments crisis is best described as

a sharp change in foreign reserves sparked by a change in expectations about the future exchange rate.

The expectation of future devaluation causes a balance of payments crisis marked by

a sharp fall in reserves and a rise in the home interest rate above the world interest rate.

A system of managed floating exchange rates is

a system in which governments may attempt to moderate exchange rate movements without keeping exchange rates rigidly fixed.

A managed floating exchange rate refers to

an exchange rate that is not​ pegged, but does not float freely.

In long−run equilibrium after a permanent money−supply increase there​ follows:

an increase in exchange​ rate, E.

Under a floating exchange rate​ regime, an increase in the demand for a​ country's exports will lead to

an increase in output that is smaller than would be under a fixed exchange rate regime.

Advocates of flexible exchange rates claim that under flexible exchange​ rates, the central bank of

an overheated economy could cool down activity by contracting the money supply without worrying that undesired reserve inflow would undermine its stabilization effort.

When the central bank buys an asset from the​ public, ________ in central bank liabilities associated with the asset purchase causes the money supply to​ ________. When the central bank sells an asset to the​ public, ________ in central bank liabilities causes the money supply to​ ________.

an​ increase; expand; a​ decrease; shrink

By external​ balance, most economists mean

avoiding excessive imbalances in international payments.

Some claim that the long and agonizing periods of speculation preceding exchange rate realignments would

become less severe under floating.

Under fixed exchange​ rates, domestic asset transactions by the central bank

can be used to alter the level of foreign reserves but not to affect the state of employment and output.

In a financially integrated world in which funds can move instantly between national financial​ markets, fixed exchange rates

cannot be credibly maintained over the long run unless countries are willing to maintain controls over capital movements​ (as China​ does).

In a system of floating exchange​ rates,

central banks do not intervene in the foreign exchange market to fix rates.

Aggregate demand for an open​ economy's output is the sum of

consumption​ demand, investment​ demand, government​ demand, and net export demand.

Which of the following is one component of the​ "trilemma" that is faced by policy makers in choosing monetary​ arrangements? Question content area bottom Part 1 A. restrictions on international capital movements B. exchange rate stability C. tariffs and subsidies D. global inflation E. restrictions on the migration of labor

exchange rate stability

Organizations whose members agree to fix their mutual exchange rates while allowing their currencies to fluctuate in value against the currencies of nonmember countries are called

exchange rate unions.

Because a country with a current account deficit is transferring wealth to​ foreigners, domestic consumption is​ ________ over time and foreign consumption is​ ________.

falling; rising

Under the gold​ standard, the primary responsibility of a central bank was to

fix the exchange rate between its currency and gold.

The gold​ standard, like a reserve currency​ system, results in

fixed exchange rates between all currencies.

A central​ bank's international reserves consists of its holdings of

foreign assets and gold.

By internal​ balance, most economists mean

full employment and domestic price level stability.

In the short​ run, a permanent increase in the domestic money supply

has stronger effects on the exchange rate and output than an equal temporary increase.

Which of the following is NOT among the quantitative indicators for the U.S. Department of the Treasury to judge whether it should name a country a currency​ manipulator? Question content area bottom Part 1 A. official net intervention purchases of foreign currency totaling more than 2 percent of​ GDP, taking place in at least six of the past twelve months B. having an inflation rate of more than 10 percent a year C. having an overall​ (multilateral) current account surplus of more than 2 percent of GDP D. having a bilateral trade surplus of more than​ $20 billion with the United States

having an inflation rate of more than 10 percent a year

If one compares​ low-inflation economies with economies in which inflation is high and very​ volatile, the degree of exchange rate​ pass-through is likely to be The reasoning behind the correct response given above centers on the

higher in the​ high-inflation economies. ability and willingness of foreign sellers to alter their foreign currency prices.

The Current Account may fall after a real depreciation because

import orders are placed in advance and a depreciation raises the domestic price.

A temporary fiscal expansion​ (with full​ employment) will

increase GDP.

The outcome of the​ government's expansionary monetary policy that leads to high inflation without average gain in output is called

inflation bias.

By fixing the exchange​ rate, the central bank gives up its ability to

influence the economy through monetary policy.

If central banks were no longer obliged to intervene in currency markets to fix exchange​ rates, governments would be able to use monetary policy to reach

internal and external balance.

An increase in the real exchange rate

makes imports more expensive.

A sudden decrease in the U.S. price level

makes those with dollar debts worse off.

A government spending multiplier

measures the size of the increase in output caused by an increase in government spending.

In the short run

monetary expansion causes the CA to increase​ & fiscal expansion causes the CA to decrease.

When an economy is in a liquidity​ trap,

monetary policy cannot be used to influence the exchange rate.

To avoid procedural​ delays, governments are likely to respond to disturbances by changing​ ________ even when a shift in​ ________ would be more appropriate.

monetary​ policy; fiscal policy

A temporary increase in an​ economy's money supply produces

no change in the​ long-run expected exchange​ rate, a depreciation of its​ currency, and a rise in its output and employment.

A temporary fiscal expansion in an economy produces

no change in the​ long-run expected exchange​ rate, an appreciation of its​ currency, and a rise in its output and employment.

The international capital market​ is:

not really a single​ market, but a group of closely interconnected markets in which asset exchanges with some international dimension take place.

The percent by which import prices rise when the home currency depreciates by​ 1% is the degree of

pass−through from exchange rates to import prices.

The​ "rules of the​ game" under the gold standard can best be described as which of the​ following:

selling domestic assets in a deficit and buying assets in a surplus.

Inflation targeting is a process where a central bank

sets a specific inflation target to help set inflation expectations.

Under the fixed rate regime foreign countries could hold their dollar exchange rates constant by

setting their domestic interest rate equal to the U.S. interest rate.

In the short​ run, a tax decrease

shifts the​ DD-curve to the​ right, increases​ output, and appreciates the currency.

A combination of stagnating output and high inflation is called

stagflation.

Central banks sometimes carry out equal foreign and domestic asset transactions in opposite directions to nullify the impact of their foreign exchange operations on the domestic money supply. This type of policy is called

sterilized foreign exchange intervention.

Fiscal expansion

stimulates aggregate demand and causes output to rise.

When countries begin to have trouble meeting their payments on past foreign​ loans, foreign creditors become reluctant to lend them new funds and may even demand immediate repayment of the earlier loans. Economists refer to such an event as a sudden​ ________ in foreign lending.

stop

In the short−​run, we assume that the money prices of goods and services are

temporarily fixed.

Which currency is not only the key vehicle currency in the global foreign exchange market but also the dominant invoice​ currency?

the U.S. dollar

The global financial crisis in 2007 started as a result of

the U.S. subprime mortgage crisis.

In the short​ run, a​ country's overall output level depends on​ ________; in the long​ run, domestic output depends only on​ ________.

the aggregate demand for its​ products; the available domestic supplies of factors of production such as labor and capital

What is a reverse​ currency?

the currency central banks hold in their international reserves

Under fixed exchange​ rate, the response of an economy to a temporary fall in foreign demand for its exports is

the currency remains the​ same, and output decreases.

Under flexible exchange​ rate, the response of an economy to a temporary fall in foreign demand for its exports is

the currency​ depreciates, and output falls.

Under a fixed exchange​ rate, the foreign exchange market is in equilibrium when the interest parity condition holds—that is

the domestic and foreign interest rates are​ equal, R=R*.

The collapse of the Bretton Woods system marked

the end of fixed exchange rates and a move to floating exchange rates.

A ​J-curve describes

the gradual effect of real depreciation on the current account.

Imperfect asset substitutability​ assumes:

the returns on foreign and domestic currency differ and are influenced by risk.

The J−curve illustrates which of the​ following?

the short−term effects of depreciation on the current account

If a​ country's nominal interest rate is​ zero, then

the​ country's economy is in a liquidity trap.

A. Central banks that were persistently losing gold

took actions that resulted in pushing domestic interest rates upward.

The economy as a whole is in equilibrium only

when both the output market and the asset markets are in equilibrium.

If an economy is in a liquidity​ trap, then the nominal interest rate is​ ________ and the only effective policy that can be used to stimulate the economy is​ ________.

zero or​ negative; expansionary fiscal policy

Britain returned to the gold standard in​ ________, then left again in​ ________ when foreign holders of sterling lost confidence in​ Britain's promise to maintain the​ currency's value and began converting their sterling to gold.

​1925; 1931

The global financial crisis of 2007−2008 resulted in​ a(n) ________ of the Swiss franc as foreign currency flowed​ ________ the country. As​ result, Swiss products became​ ________ competitive in world markets.

​appreciation; into; less

The net foreign wealth of an economy with a​ ________ is​ ________ over time.

​deficit; falling

With imperfect asset​ substitutability, sterilized purchases of foreign exchange can cause the home currency to​ ________, and sterilized sales of foreign exchange can cause the home currency to​ ________.

​depreciate; appreciate

A real​ ________ of the home currency raises aggregate demand for home​ output, other things​ equal; a real​ ________ lowers aggregate demand for home output.

​depreciation; appreciation

Because each consumer demands​ ________ goods and services as his or her real income​ ________, consumption will​ ________ as disposable income​ ________ at the aggregate level.

​more; rises;​ increase; increases

Given P and ​P*​, a rise in E​ ________ net exports and​ ________ the current account.

​raises; improves

Under a gold​ standard, whenever a country is losing reserves and seeing its money supply​ ________ as a​ consequence, foreign countries are gaining reserves and seeing their money supplies​ ________.

​shrink; expand