ECON349 Chapters 19-22 FINAL

Evaluate the following statement concerning macroeconomic interdependence under a floating exchange rate​ regime: A permanent monetary contraction in country A will ▼ increase reduce not affect output in that country and its currency will ▼ appreciate depreciate . Output in country​ A's trading partners ▼ could possibly rise or fall would be expected to fall would be expected to rise .

reduce appreciate could possibly rise of fall

Suppose the production function for aggregate output in the United States is the same as in​ India, Upper Y equals Upper A Upper K Superscript alpha Baseline Upper L Superscript 1 minus alpha ​, where A is the total productivity​ factor, K is the capital​ stock, and L is the supply of labor. In​ 2010, India and the United States had per capita incomes​ of, respectively,​ $3,413 and​ $41,858. From these values it can be determined that the ratio of per capita income ​(​Y/L) in India to that of the United States in 2010 was nothing . ​(Round your answer to three decimal​ places.) Using this information and letting the​ capital-labor ratio in India and the United States be​ given, respectively, as k Subscript Upper I and k Subscript US ​, an expression giving the ratio of​ capital's marginal product in India to its marginal product the U.S.​ (the marginal product of capital is given by alpha Upper A Upper K Superscript alpha minus 1 Baseline Upper L Superscript 1 minus alpha ​) is A. 12.184 times ​(k Subscript Upper I​/k Subscript US ​) B. 0.082 times ​(k Subscript Upper I​/k Subscript US ​) C. 12.184 times ​(k Subscript US​/k Subscript Upper I ​) D. 0.082 times ​(k Subscript US​/k Subscript Upper I ​) The answer to the previous question ▼ supports contradicts the Lucas puzzle LOADING... of capital flows from rich to poor countries since it suggests that a lower​ capital-labor ratio ▼ doesn't necessarily unambiguously ​mean(s) a higher MPK. In order to make the marginal product of capital the same in the two​ countries, total factor productivity in India ​(Upper A Subscript Upper I ​) relative to its value for the U.S. ​(Upper A Subscript US ​) must equal A. left parenthesis k Subscript Upper I Baseline divided by k Subscript US Baseline right parenthesis Superscript alpha B. left parenthesis k Subscript Upper I Baseline divided by k Subscript US Baseline right parenthesis C. left parenthesis k Subscript Upper I Baseline divided by k Subscript US Baseline right parenthesis Superscript 1 minus alpha D. left parenthesis k Subscript US Baseline divided by k Subscript Upper I Baseline right parenthesis Superscript 1 minus alpha Click to select your answer(s).

.082 D. 0.082 times ​(k Subscript US​/k Subscript Upper I ​) supports doesnt necessarily C. left parenthesis k Subscript Upper I Baseline divided by k Subscript US Baseline right parenthesis Superscript 1 minus alpha

In the EMS before September 1992 the​ lira/DM exchange rate could fluctuate by up to 2.25 percent up or down. Assume that the​ lira/DM central parity and band were set in this way and could not be changed. In this​ case, the maximum possible difference between the interst rates on ​one-year lira and DM deposits would have been nothing percent. The maximum possible difference between the interst rates on six​-month lira and DM deposits would have been nothing percent. On​ three-month deposits, nothing percent. ​(Enter all responses as percentages rounded up to two decimal places​.)

4.50 9.00 19.25

How many countries were members of the EMU when the Euro was​ introduced? A. 12 B. 9 C. 15 D. 11

A. 12

Which of the following contributed to the debt crisis of the​ 1980s? A. A fall in primary commodity prices. B. A sharp depreciation of the dollar. C. A fall in world interest rates. D. An increase in world aggregate demand.

A. A fall in primary commodity prices.

Which of the following is NOT a lesson emerging from the 1990 Asian crisis and earlier​ developing-country crises in Latin America and​ elsewhere? A. A large part of what made the Asian crisis so devastating was that it was more or less a currency crisis. B. The order of in which liberlization measures are taken really does matter. C. It is perilous for a developing country to fix its exchange rate unless it has the means and commitment to do so. D. The problem of​ contagion, and the concern that even the most careful economic management may not offer full​ immunity, has generated an interest in possible reforms of the international financial system.

A. A large part of what made the Asian crisis so devastating was that it was more or less a currency crisis.

Which of the following is NOT a clear lesson emerging from the 1990 Asian crisis and earlier​ developing-country crises in Latin America and​ elsewhere? A. A relatively strong economic shield that provides the economy barriers from external shocks. B. A sound banking system as a key component of the entire financial structure. C. A proper sequence of​ economic, financial and​ real, reform measures. D. An appropriate exchange rate system.

A. A relatively strong economic shield that provides the economy barriers from external shocks.

Which of the following contributed to the​ "East Asian​ miracle"? A. An emphasis on education. B. Capital controls. C. Low saving rates and high consumption demand. D. Protectionist trade policy.

A. An emphasis on education.

Assume that the Argentine central​ bank's assets consist of 100 percent of​ interest-bearing U.S. Treasury bonds. If Argentina gave up its peso and dollarized its economy​ completely, what and how much does it​ sacrifice? ​(​Hint: Think through the actual steps Argentina should have to take to dollarize its economy​.) A. Argentina loses interest by holding​ non-interest bearing dollar bills instead of​ interst-earning U.S. treasury bills. B. There is no real loss. Argentina can trade the U.S. bonds it holds for dollars to use as currency and any expansion of of the money supply can be obtained by sending real​ goods, services, or assets to the U.S. for​ dollars, which can cahed in for goods and services from the U.S. whenever it wants. C. The Argentine central bank loses completely its power to control the money supply. D. Since Argentina already operates a currency board holding U.S. bonds as its​ assets, dollarization would not impose any further cost.

A. Argentina loses interest by holding​ non-interest bearing dollar bills instead of​ interst-earning U.S. treasury bills.

What generally is an accurate description of a currency​ board? A. A​ "vending machine" like​ nature, where domestic and foreign currency can automatically be swapped at a given rate. B. A high degree of domestic assets as backing of the money supply. C. A large amount of Gold as part of reserves. D. High inflation caused by excessive currency growth due to a lack of central bank control over the money supply due to its automated nature.

A. A​ "vending machine" like​ nature, where domestic and foreign currency can automatically be swapped at a given rate.

In the EMS before September 1992 the​ lira/DM exchange rate could fluctuate by up to 2.25 percent up or down. Assume that the​ lira/DM central parity and band were set in this way and could not be changed. Imagine that in Italy the interest rate on​ five-year government bonds was 11 percent per​ annum; in Germany the rate on​ five-year government bonds was 8 percent per annum. What would have been the implications for the credibility of the current​ lira/DM exchange​ parity? A. A​ three-percent difference on the annual rate of a​ five-year bond means a difference of 1.03 Superscript 5 Baseline equals 1.159 ​, which was far above the amount that would be consistent with the maintenance of the EMS bands​ (4.5%). B. The maximum change in the​ lira/DM exchange rate was 2.25​ percent, so a three percent difference on the annual rate was above the amount of the maximum change of exchange rate.​ Thus, there was a slight problem with the credibility for the maintenance of the EMS band. C. The maximum change in the​ lira/DM exchange rate was 4.5 percent​ (2.25 -​ (-2.25) =​ 4.5), so a three percent difference on the annual rate was below the amount of the maximum change of exchange rate. D. A rate differential on​ five-year government bonds of the two countries has no direct implications for the maintenance of the EMS exchange rate parity.

A. A​ three-percent difference on the annual rate of a​ five-year bond means a difference of 1.03 Superscript 5 Baseline equals 1.159 ​, which was far above the amount that would be consistent with the maintenance of the EMS bands​ (4.5%).

What is the implication of the dilemma of the exchange rate regime for the problems of international macroeconomics and finance of developing​ countries? A. Either rigidly fixed exchange rates​ (a loss of monetary​ autonomy) or managed exchange rates is an alternative when increased capital movements make adjustable pegs more vulnerable to speculation. B. The increased capital mobility makes adjustable peg regimes free of original sin at the cost of increased volatility of financial transactions. C. Some major developing​ countries, like India and​ China, opted for the choice of monetary policy autonomy and freedom of capital movement and were successful. D. The adjustable​ peg, if maintained reasonably​ successful, can achieve goals of freedom of capital movement and exchange rate​ stability, but not that of monetary policy autonomy.

A. Either rigidly fixed exchange rates​ (a loss of monetary​ autonomy) or managed exchange rates is an alternative when increased capital movements make adjustable pegs more vulnerable to speculation.

What country joined the EMU after it was initially formed in 1999 and before the Euro was​ introduced? A. Greece B. Denmark C. United Kingdom D. Sweden

A. Greece

Early studies of the economic convergence​ hypothesis, looking at data for a group of currently industrialized​ countries, found that those that were relatively poor a century ago subsequently grew more quickly. Is it valid to infer from this finding that the convergence hypothesis is​ valid? A. Looking simply at countries that are currently industrilized and finding convergence is not a valid way to test the hypothesis. B. Currently industrilized countries have all started with the same characteristics a century​ ago, so the conclusion can not be applied to currently developing countries. C. It is valid to expect that a century later currently developing countries would eventually catch up with industrialized countries. D. Recent research on geographical issues such as disease​ environment, human​ capital, and institutional features has proved that the convergence hypothesis is not valid.

A. Looking simply at countries that are currently industrilized and finding convergence is not a valid way to test the hypothesis.

A currency board can achieve A. exchange rate stability and free capital​ movement, but not effective monetary policy. B. exchange rate​ stability, free capital movement and effective monetary policy. C. effective monetary policy and free capital​ movement, but not exchange rate stability. D. exchange rate stability and effective monetary​ policy, but not free capital movement.

A. exchange rate stability and free capital​ movement, but not effective monetary policy.

Suppose an economy open to international capital movements has a crawling peg exchange rate under which its currency is pegged at each moment but is continuously devalued at a rate of 20 percent per year. How would the domestic nominal interest rate be related to the foreign nominal interest​ rate? A. The domestic nominal interst rate would be 20 percent higher than the foreign nominal interest rate. B. Not enough information is available to compare the nominal interest​ rates; for​ example, money grwoth rates and current account deficits are necessary. C. The domestic nominal interst rate would be 20 percent lower than the foreign nominal interest rate. D. The domestic nominal interst rate would be equal to the foreign nominal interest​ rate, but the​ country's real interest rate would be higher than the foreign. If the crawling peg is not fully​ credible, the interst differential will be ▼ higher lower the same as the possibility of a large devaluation makes the expected depreciation ▼ smaller than larger than equal to 20 percent.

A. The domestic nominal interst rate would be 20 percent higher than the foreign nominal interest rate. higher larger than

In some emerging market​ economies, not only are debt obligations to foreigners denominated in​ dollars, so are many of the​ economies' internal​ debts, that​ is, debts of one domestic resident to another. This phenomenon is sometimes called liability dollarization. How might liability dollarization worsen the financial market disruption caused by a sharp depreciation of the domestic currency against the​ dollar? A. The exchange risk applies to all debts denominated in dollars and depreciation can have far more widespread effects throughout the economy. B. Some domestic borrowers might become insolvent after devaluation but the financial system is immune from any further effect from the internal debts. C. The risks from devaluation to emerging​ markets' borrowing, an outcome of original​ sin, applies only to debt obligations to foreigners. D. The depreciation affects only participants in global financial markets.

A. The exchange risk applies to all debts denominated in dollars and depreciation can have far more widespread effects throughout the economy.

Which of the following does NOT help explain why developing countries often have a larger role for the government in their​ economies? A. The failure of vested interests to dominate political institutions in developing countries allowed state intervention policies to persist. B. Attempts to industrialize by replacing imported​ (import substitution) required a large role of the government to start industries and subsequently protect them. C. As the Great Depression began and the Gold standard​ collapsed, many countries relied on direct control of the economy. These policies have persisted. D. All of these reasons help explain the role of the government in the economy in developing countries.

A. The failure of vested interests to dominate political institutions in developing countries allowed state intervention policies to persist.

What is a good reason to focus on GDP per capita rates and growth​ rates? A. These statistics are correlated with other meaningful variables such as life expectancy. B. They help demonstrate the similar economic situations of all​ countries, despite large differences in country size. C. They are a good measure of the world wide economic importance of a nation. D. There is no good​ reason, they are meaningless statistics.

A. These statistics are correlated with other meaningful variables such as life expectancy.

Why do developing countries use seignorage as a method of raising​ money? A. Weak institutions make standard tax collection more difficult. B. Import substitution required​ seignorage, so many developing countries used it. C. If the banking system is not well​ organized, seignorage is a necessary thing. D. These countries do not understand that printing money may lead to more inflation

A. Weak institutions make standard tax collection more difficult.

In the United States currency​ union, we seem never to worry if a state has a big current account deficit. Have you ever seen such data in the​ newspaper? For​ example, one would guess that the state of Louisiana ran large current account deficits after it was devastated by Hurricane Katrina in 2005. But​ Louisiana's current account deficit was not deemed worthy of coverage by the financial press. We do​ know, however, that in​ 2008, Greece had a current account deficit of 14.6 percent of​ GDP, Portugal had a deficit of 12 percent of​ GDP, and Spain had a deficit of 9.8 percent of GDP. Should the governments of these countries worry about these large​ deficits? ​(​Hint: Relate your answer to the debate over the need for the SGP​.) A. Yes. B. No.

A. Yes.

Under a floating exchange rate​ regime, an increase in the demand for a​ country's exports will lead to A. an increase in output that is smaller than would be under a fixed exchange rate regime. B. a decline in output that is larger than would be under a fixed exchange rate regime. C. an increase in output that is larger than would be under a fixed exchange rate regime. D. a decline in output that is smaller than would be under a fixed exchange rate regime.

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

EMS provisions for the extension of central bank credits from​ strong-to-weak-currency members might have increased the stability of EMS exchange​ rates, because A. a​ weak-currency central bank can defend its currency by putting at its disposal more reserves borrowed from a​ strong-currency cnetral bank. B. a​ weak-currency central bank can defend its currency simply by buying its domestic assets with the help of the​ stong-currency central bank which in turn sells its foreign reserves of the weak currency. C. a​ strong-currency central bank can stabilize the exchange rate by increasing its reserve of domestic assets. D. in​ theory, any two member​ countries' central banks can act together to fix the exchange rate between their currencies at any level.

A. a​ weak-currency central bank can defend its currency by putting at its disposal more reserves borrowed from a​ strong-currency cnetral bank.

Under the Bretton Woods​ system, the increase in the U.S. inflation rate would lead to A. inflation in the countries that pegged their currencies to the U.S. dollar. B. depreciation of the U.S. dollar versus gold. C. inflation in the countries that pegged their currencies to gold. D. depreciation of the U.S. dollar versus other currencies.

A. inflation in the countries that pegged their currencies to the U.S. dollar.

The​ Euro-zone is not an optimum currency area because A. labor mobility is too low among European countries. B. capital mobility is too low among European countries. C. it does not include all of the EU. D. it includes too many countries.

A. labor mobility is too low among European countries.

Countries with fixed exchange rates that allow free​ cross-border capital mobility sacrifice A. monetary policy oriented toward domestic goals. B. freedom of international capital movements. C. exchange rate stability. D. ​nothing: no trilemma exists in this case.

A. monetary policy oriented toward domestic goals.

According to the proponents favoring the institutions of government as the decisive​ factor, A. the success of government in protecting private property rights is a key to economic growth. B. the lack of instrumental variables measuring institutional quality is not a major critics against the theory as the case of​ China's institutional reform efforts has shown. C. the statistical evidence shown by the effect of mortality rat on the institutions governing property rights is sufficient to disprove the theory. D. the negative association between lower corruption and higher​ per-capita income has demonstrated a clear proof for the theory.

A. the success of government in protecting private property rights is a key to economic growth.

Much​ developing-country borrowing during the 1970s was carried out by​ state-owned companies. In some of these countries there have been moves to privatize the economy by selling state companies to private owners. If their economies had been privatized​ earlier, A. there may have been less lending available to private firms than to​ state-owned firms because lenders were typically assured that state guaranteed the repayment by​ state-owned companies. B. there may have been more lending available to private firms than to​ state-owned firms because private firms would have been run more efficiently and so had more profitable projects than​ state-owned firms. C. there may have been less lending available to private firms than to​ state-owned firms because private firms were less efficient in the 1970s. D. there may not have been much differences because the government would have been pressured into taking over the debts of private firms.

A. there may have been less lending available to private firms than to​ state-owned firms because lenders were typically assured that state guaranteed the repayment by​ state-owned companies.

Why did the Asian​ crisis, not earlier crises of the​ 1990s, prompt the recent discussion of reforming the​ world's financial​ architecture? A. The Asian crisis was more pronounced and wide spread than the other crises. B. The Asian economic role in the international trade and finance became increasingly more important. C. The crisis has shown that the apparent strength of contagion through the international capital markets was much more severe. D. The crisis demonstrated that a country can not be vulnerable as long as the international financial architecture was firmly in place and the fundamentals of its real economy are sound.

C. The crisis has shown that the apparent strength of contagion through the international capital markets was much more severe.

Imagine that the EMS had become a monetary union with a single currency but that it sreated no European Central Bank to manage this currency.​ Instead, imagine that the task had been left to the various national central​ banks, each of which was allowed to issue as much of the European currency as it liked and to conduct​ open-market operations. What problem can you foresee arising from such a​ scheme? A. The EMS basic stipulation would force all central banks to conduct their monetary policies properly so that the end result would be the same as with European Central Bank. B. A higher inflation in the system than would otherwise occur if central bank actions were coordinated. C. A lower inflation in the system than would otherwise occur if central bank actions were coordinated. D. A​ system-wide interst parity condition.

B. A higher inflation in the system than would otherwise occur if central bank actions were coordinated.

Which of the following contributed to the​ "East Asian​ miracle"? A. Low saving rates and high consumption demand. B. An emphasis on education. C. Capital controls. D. Protectionist trade policy.

B. An emphasis on education.

Which of the following statements does NOT describe the geography​ theory? A. The more temperate regions of​ Europe, which could support agricultural​ innovations, would do better than tropical zones with unfriendly​ weather, an absence of easily domesticated large animal​ species, and the presence of serious diseases. B. Because more favorable geography leads to higher income​ and, through higher​ income, to a better institutional​ environment, the geography theory encompasses the theory of institutions of government. C. Aspects of a​ country's physical environment determine its​ long-run economic performance. D. Access to international trade is one of the key factors behind a​ country's long-run economic performance.

B. Because more favorable geography leads to higher income​ and, through higher​ income, to a better institutional​ environment, the geography theory encompasses the theory of institutions of government.

The external debt buildup of some developing countries​ (such as​ Argentina) in the 1970s was in part due to​ (legal or​ illegal) capital flight in the face of expected currency devaluation.​ (Governments and central banks borrowed foreign currencies to prop up their exchange​ rates, and these funds found their way into private hands and into bank accounts in New York and​ elsewhere.) Since capital flight leaves a government with a large debt but creates an offsetting foreign asset for citizens who take money​ abroad, the consolidated net debt of the country as a whole does not change. What may be the consequence of debt problem for countries whose external government debt is largely the result of capital​ flight? A. Because the net debt remains the​ same, they do not have any further problems from capital flight. B. Capital flight exacerbates debt problems because the government is left holding a greater debt itself but may not be able to identify and tax the people who benefited from the capital movements. C. Capital flight leaves the government with the same amount of debt but may have a political instability resulting from the distorted income distribution. D. Capital flight may create income distribution problems if the government tries tax those who did not benefit from the opportunity to move funds out of the country.

B. Capital flight exacerbates debt problems because the government is left holding a greater debt itself but may not be able to identify and tax the people who benefited from the capital movements.

What is NOT a consequence of inconvertible​ currencies? A. International trade is reduced to barter. B. Frequent devaluations and crises. C. A lack of financial flows. D. All are the result of inconvertible currencies.

B. Frequent devaluations and crises.

Movements in the​ euro's external exchange rate can be seen as​ goods-market shocks that have asymmetric effects on different effects on different euro zone members. When the euro appreciated against​ China's currency in​ 2004, which country suffered the greater fall in aggregate​ demand, Germany, which does not compete directly with China in its export​ markets, or​ Greece, which​ does? A. Germany B. Greece C. Both equally D. Uncertain

B. Greece

Why would we expect convergence of living standards across​ countries? A. There is automatically a convergence in labor force participation rates once a country is relatively advanced. B. If countries trade goods and​ assets, capital and technology can flow to where they are needed the​ most, roughly equilibrating GDP per capita. C. Once a country has a GDP per capita over​ $20,000 a​ year, their growth rate automatically begins to​ slow, allowing others to catch up. D. If countries​ trade, they get to consume the same products.

B. If countries trade goods and​ assets, capital and technology can flow to where they are needed the​ most, roughly equilibrating GDP per capita.

Because the risk of financial crisis is what makes the choice of exchange rate regime very​ difficult, some proposals center on ways to reduce that risk. Which is NOT one of​ them? A. Stronger banking and financial systems. B. Improved mix of capital inflows more toward debt financing. C. Enhanced special credit lines available in the event of a curency crisis. D. Greater transparency in financial information of borrowers.

B. Improved mix of capital inflows more toward debt financing.

In the early​ 1980s, Brazil's​ government, through an average inflation rate of 147 percent per​ year, got only 1.0 percent of output as​ seignorage, while Sierra​ Leone's government got 2.4 percent through an inflation rate less than a third as high. What might be the differences in financial structure that partially explain this​ contrast? (Hint: In Sierra Leone the ratio of currency to nominal output averaged 7.7​ percent: in Brazil it averaged only 1.4​ percent.) A. Brazilians were more sensitive than residents of Sierra Leone in managing their money money​ holdings, so they were making more frequent transactions with less balances. B. In the face of higher​ inflation, Brazilians find it more advantageous than residents of Sierra Leone to economize on their money holdings by using automatic teller machines. C. In the face of higher​ inflation, Brazilians find it less advantageous than residents of Sierra Leone to rely on using money balances in​ transactions, which reduces their average money holdings. D. Residents of Sierra Leone had to rely heavily on​ currency, whereas Brazilians had more choices of holding money.

B. In the face of higher​ inflation, Brazilians find it more advantageous than residents of Sierra Leone to economize on their money holdings by using automatic teller machines.

In the early​ 1980s, Brazil's​ government, through an average inflation rate of 147 percent per​ year, got only 1.0 percent of output as​ seignorage, while Sierra​ Leone's government got 2.4 percent through an inflation rate less than a third as high. What might be the differences in financial structure that partially explain this​ contrast? (Hint: In Sierra Leone the ratio of currency to nominal output averaged 7.7​ percent: in Brazil it averaged only 1.4​ percent.) A. Brazilians were more sensitive than residents of Sierra Leone in managing their money money​ holdings, so they were making more frequent transactions with less balances. B. In the face of higher​ inflation, Brazilians find it more advantageous than residents of Sierra Leone to economize on their money holdings by using automatic teller machines. C. Residents of Sierra Leone had to rely heavily on​ currency, whereas Brazilians had more choices of holding money. D. In the face of higher​ inflation, Brazilians find it less advantageous than residents of Sierra Leone to rely on using money balances in​ transactions, which reduces their average money holdings.

B. In the face of higher​ inflation, Brazilians find it more advantageous than residents of Sierra Leone to economize on their money holdings by using automatic teller machines.

There are a few clear lessons emerging from the 1990 Asian crisis and earlier​ developing-country crises in Latin America. Which of the following country cases does NOT belong to the case of an inappropriate exchange rate​ regime? A. Thailand in the late 1990s B. Mexico in the 1990s C. South Korea in 1997 D. Argentina in the 1980s

B. Mexico in the 1990s

Before​ Brexit, Britain was firmly within the​ EU, but it​ didn't adopt the​ euro, and fierce debate raged over the issue. a. Find macro data on the British​ economy's performance since 1998​ (inflation, unemployment, real GDP​ growth) and compare these with euro zone data. Which of the follwoing describes the comparative​ performances? A. ​UK's performance, in terms of unemployment and real GDP​ growth, was exactly the same as the average of the euro zone. B. The United Kingdom has had a stronger economy for much of the period since 1998 as compared to averages across the euro zone. C. The United Kingdom has had a weaker economy for much of the period since 1998 as compared to averages across the euro zone. b. What were nominal interest rates in Britain and the euro zone after​ 1998? If the ECB had been setting​ Britain's nominal interest rates at the euro zone level and the pound​ sterling's euro exchange rate had been​ fixed, how would Britain have​ fared? A. If the UK had been part of euro​ area, it would have shared monetary policy with other countries and its inflation rate would have been much higher. B. The​ UK's short-term interest rates were lower than those of the euro zone​ and, if the UK had been part of euro​ area, the rates would have been higher C. If the UK had been part of euro​ area, it would have shared monetary policy with other countries and interest rates might have been lower with a higher output growth. D. The​ UK's interest rates would have been​ higher, implying that the​ UK's output growth would have been hurt and unemployment higher.

B. The United Kingdom has had a stronger economy for much of the period since 1998 as compared to averages across the euro zone. C. If the UK had been part of euro​ area, it would have shared monetary policy with other countries and interest rates might have been lower with a higher output growth.

Suppose an economy open to international capital movements has a crawling peg exchange rate under which its currency is pegged at each moment but is continuously devalued at a rate of 20 percent per year. How would the domestic nominal interest rate be related to the foreign nominal interest​ rate? A. The domestic nominal interst rate would be equal to the foreign nominal interest​ rate, but the​ country's real interest rate would be higher than the foreign. B. The domestic nominal interst rate would be 20 percent higher than the foreign nominal interest rate. C. The domestic nominal interst rate would be 20 percent lower than the foreign nominal interest rate. D. Not enough information is available to compare the nominal interest​ rates; for​ example, money grwoth rates and current account deficits are necessary. If the crawling peg is not fully​ credible, the interst differential will be ▼ higher lower the same as the possibility of a large devaluation makes the expected depreciation ▼ equal to smaller than larger than 20 percent.

B. The domestic nominal interst rate would be 20 percent higher than the foreign nominal interest rate. higher larger than

Which of the following is NOT true regarding the world​ development? A. There is no convergence among​ low-income countries. B. There is no convergence among​ high-income countries. C. There is a big difference between the performance of developing countries in different geographical areas. D. There is no convergence between​ low-income and​ high-income countries.

B. There is no convergence among​ high-income countries.

Which of the following is NOT true regarding the world​ development? A. There is no convergence between​ low-income and​ high-income countries. B. There is no convergence among​ high-income countries. C. There is a big difference between the performance of developing countries in different geographical areas. D. There is no convergence among​ low-income countries.

B. There is no convergence among​ high-income countries.

Which of the following is NOT a typical feature of developing​ countries? A. Undeveloped capital markets B. Trade restrictions C. History of high inflation D. History of a​ government-controlled economy

B. Trade restrictions

After the breakdown of the Bretton Woods​ system, the dominant exchange rate regime in the U.S. was A. a Clean float. B. a Managed float. C. a Crawling peg. D. a fixed rate.

B. a Managed float.

A currency board can achieve A. effective monetary policy and free capital​ movement, but not exchange rate stability. B. exchange rate stability and free capital​ movement, but not effective monetary policy. C. exchange rate stability and effective monetary​ policy, but not free capital movement. D. exchange rate​ stability, free capital movement and effective monetary policy.

B. exchange rate stability and free capital​ movement, but not effective monetary policy.

Developing country borrowing A. necessarily leads to debt crises. B. is efficient because of investment opportunities in developing countries. C. is smaller than their lending. D. cannot lead to gains from trade.

B. is efficient because of investment opportunities in developing countries.

Can a government always collect more seignorage simply by letting the money supply grow​ faster? A. ​Yes, as long as the growth rate of money supply does not alter the real interest​ rate, the nominal interest would not affect the real balances people are willing to hold. B. ​No, if a higher monetary growth rate raises the nominal interest rate and reduces the real balances people are willing to​ hold, it leads to a fall in real seignorage. C. ​No, if a higher monetary growth rate raises the real interest rate and reduces the real balances people are willing to​ hold, it may eventually lead to a fall in real seignorage. D. ​Yes, as long as the growth rate of money supply exceeds the​ people's expectation, it provides the government more resources for expenditure.

B. ​No, if a higher monetary growth rate raises the nominal interest rate and reduces the real balances people are willing to​ hold, it leads to a fall in real seignorage.

Which of the following is NOT a lesson emerging from the 1990 Asian crisis and earlier​ developing-country crises in Latin America and​ elsewhere? A. It is perilous for a developing country to fix its exchange rate unless it has the means and commitment to do so. B. The problem of​ contagion, and the concern that even the most careful economic management may not offer full​ immunity, has generated an interest in possible reforms of the international financial system. C. A large part of what made the Asian crisis so devastating was that it was more or less a currency crisis. D. The order of in which liberlization measures are taken really does matter.

C. A large part of what made the Asian crisis so devastating was that it was more or less a currency crisis.

Assume that the Argentine central​ bank's assets consist of 100 percent of​ interest-bearing U.S. Treasury bonds. If Argentina gave up its peso and dollarized its economy​ completely, what and how much does it​ sacrifice? ​(​Hint: Think through the actual steps Argentina should have to take to dollarize its economy​.) A. The Argentine central bank loses completely its power to control the money supply. B. There is no real loss. Argentina can trade the U.S. bonds it holds for dollars to use as currency and any expansion of of the money supply can be obtained by sending real​ goods, services, or assets to the U.S. for​ dollars, which can cahed in for goods and services from the U.S. whenever it wants. C. Argentina loses interest by holding​ non-interest bearing dollar bills instead of​ interst-earning U.S. treasury bills. D. Since Argentina already operates a currency board holding U.S. bonds as its​ assets, dollarization would not impose any further cost.

C. Argentina loses interest by holding​ non-interest bearing dollar bills instead of​ interst-earning U.S. treasury bills.

What generally is an accurate description of a currency​ board? A. A high degree of domestic assets as backing of the money supply. B. A large amount of Gold as part of reserves. C. A​ "vending machine" like​ nature, where domestic and foreign currency can automatically be swapped at a given rate. D. High inflation caused by excessive currency growth due to a lack of central bank control over the money supply due to its automated nature.

C. A​ "vending machine" like​ nature, where domestic and foreign currency can automatically be swapped at a given rate.

Which of the following statements does NOT describe the geography​ theory? A. Access to international trade is one of the key factors behind a​ country's long-run economic performance. B. Aspects of a​ country's physical environment determine its​ long-run economic performance. C. Because more favorable geography leads to higher income​ and, through higher​ income, to a better institutional​ environment, the geography theory encompasses the theory of institutions of government. D. The more temperate regions of​ Europe, which could support agricultural​ innovations, would do better than tropical zones with unfriendly​ weather, an absence of easily domesticated large animal​ species, and the presence of serious diseases.

C. Because more favorable geography leads to higher income​ and, through higher​ income, to a better institutional​ environment, the geography theory encompasses the theory of institutions of government.

Which of the following is NOT an example of debt finance in developing​ countries? A. Citibank provides a loan to a Brazilian firm. B. A group of commercial banks provides a loan to the Brazilian government. C. Citibank purchases shares of a Brazilian firm on the stock market. D. The IMF provides a loan to the Brazilian government.

C. Citibank purchases shares of a Brazilian firm on the stock market.

Given​ output, a country can improve its current account by either cutting investment or cutting consumption​ (private or​ government). After the debt crisis of the 1980s​ began, many developing countries achieved improvements in their current accounts by cutting investment. Is this a sensible​ strategy? A. Increasing​ saving, by promoting higher interest rates​ and/or tax​ incentives, would be a more sensible strategy than cutting investment in the long run. B. Cutting government consumption would be a better strategy than reducing investment. C. Cutting investment today will lead to a loss of output​ tomorrow, so this may be a very​ short-sighted strategy. D. Considering political​ aspects, this is the only sensible alternative.

C. Cutting investment today will lead to a loss of output​ tomorrow, so this may be a very​ short-sighted strategy.

What is the implication of the dilemma of the exchange rate regime for the problems of international macroeconomics and finance of developing​ countries? A. The adjustable​ peg, if maintained reasonably​ successful, can achieve goals of freedom of capital movement and exchange rate​ stability, but not that of monetary policy autonomy. B. The increased capital mobility makes adjustable peg regimes free of original sin at the cost of increased volatility of financial transactions. C. Either rigidly fixed exchange rates​ (a loss of monetary​ autonomy) or managed exchange rates is an alternative when increased capital movements make adjustable pegs more vulnerable to speculation. D. Some major developing​ countries, like India and​ China, opted for the choice of monetary policy autonomy and freedom of capital movement and were successful.

C. Either rigidly fixed exchange rates​ (a loss of monetary​ autonomy) or managed exchange rates is an alternative when increased capital movements make adjustable pegs more vulnerable to speculation.

Under what circumstances should a country join a monetary​ union? A. If there is extensive labor mobility. B. If they hope to trade more with other countries in the currency union. C. If it has sufficient integration such that gains from union outweigh losses. D. If there is a high degree of economic integration.

C. If it has sufficient integration such that gains from union outweigh losses.

Because the risk of financial crisis is what makes the choice of exchange rate regime very​ difficult, some proposals center on ways to reduce that risk. Which is NOT one of​ them? A. Greater transparency in financial information of borrowers. B. Stronger banking and financial systems. C. Improved mix of capital inflows more toward debt financing. D. Enhanced special credit lines available in the event of a curency crisis

C. Improved mix of capital inflows more toward debt financing.

Which is NOT a likely consequence of a developing​ country's decision to reduce trade restrictions such as import tariffs regarding its ability to borrow in the world capital​ market? A. Making the economy more open to trade will lead prospective lenders to expect a higher export level and an increased ability to service its debts in the future. B. Combined with a set of policies which international lenders consider​ sound, the decision will improve​ lenders' assessment of the​ country's credit-worthiness. C. Less government interventions imply an increased penalty for​ default, which will further intimidate potential lenders to provide capital to the country as a whole. D. By making the economy more open to​ trade, liberalization is likely to enhance a developing​ country's ability to borrow abroad.

C. Less government interventions imply an increased penalty for​ default, which will further intimidate potential lenders to provide capital to the country as a whole.

Early studies of the economic convergence​ hypothesis, looking at data for a group of currently industrialized​ countries, found that those that were relatively poor a century ago subsequently grew more quickly. Is it valid to infer from this finding that the convergence hypothesis is​ valid? A. Recent research on geographical issues such as disease​ environment, human​ capital, and institutional features has proved that the convergence hypothesis is not valid. B. It is valid to expect that a century later currently developing countries would eventually catch up with industrialized countries. C. Looking simply at countries that are currently industrilized and finding convergence is not a valid way to test the hypothesis. D. Currently industrilized countries have all started with the same characteristics a century​ ago, so the conclusion can not be applied to currently developing countries.

C. Looking simply at countries that are currently industrilized and finding convergence is not a valid way to test the hypothesis.

Which of the following contributed to the end of the gold standard in the​ 1930s? A. An increase in the volume of international trade. B. Discoveries of gold that led to worldwide inflation. C. Retaliatory​ beggar-thy-neighbor policies. D. An insufficient world supply of gold.

C. Retaliatory​ beggar-thy-neighbor policies.

​Today's world is characterized by a vast international dispersion in levels of income and​ well-being, which contradicts the simple theory of convergence. Which of the following statements describes the apparent failure of the​ theory? A. Some developed countries usurped the major portion of the​ world's available current account​ surpluses, thereby limiting the flow of capital to developing countries. B. Because of low marginal products of investment in developing​ countries, the​ low-income countries tend to grow more slowly than rich ones. C. The high risks of investing in many developing countries are the primary reasons for the failure of the model. D. The fundamental assumptions of the hypotheses are erroneous.

C. The high risks of investing in many developing countries are the primary reasons for the failure of the model.

Which of the following weaknesses of East Asian development became apparent with the 1997​ crisis? A. An increase in​ productivity, but not in the saving rate. B. Overly stringent bankruptcy laws. C. The poor state of banking regulation. D. Irresponsible fiscal policies of goverments.

C. The poor state of banking regulation.

Which of the following is NOT a typical feature of developing​ countries? A. History of high inflation B. History of a​ government-controlled economy C. Trade restrictions D. Undeveloped capital markets

C. Trade restrictions

Some critics of the adoption of fixed exchange rates by emerging market economies argue that they create a kind of moral hazard. Do you​ agree? ​(​Hint: Might borrowers behave differently if they knew exchange rates were changeable from day to ​day?​) A. No. The moral hazrd does not come from the fact that borrowers may borrow in a foreign eurrency with a fixed exhange rate. B. No. The moral hazard comes from the fact that the borrowers in a foreign currency engage in risky projects. C. Yes. Flexible exchange rates would have forced the borrowers to hedge against the risk of exchange rate volatility. D. Yes. A fixed exchange rate system would have encouraged the borrowers to take riskier projects.

C. Yes. Flexible exchange rates would have forced the borrowers to hedge against the risk of exchange rate volatility.

Some critics of the adoption of fixed exchange rates by emerging market economies argue that they create a kind of moral hazard. Do you​ agree? ​(​Hint: Might borrowers behave differently if they knew exchange rates were changeable from day to ​day?​) A. Yes. A fixed exchange rate system would have encouraged the borrowers to take riskier projects. B. No. The moral hazrd does not come from the fact that borrowers may borrow in a foreign eurrency with a fixed exhange rate. C. Yes. Flexible exchange rates would have forced the borrowers to hedge against the risk of exchange rate volatility. D. No. The moral hazard comes from the fact that the borrowers in a foreign currency engage in risky projects.

C. Yes. Flexible exchange rates would have forced the borrowers to hedge against the risk of exchange rate volatility.

A confidence problem is A. a lack of confidence that the IMF will help the countries with current account deficits. B. a lack of confidence in all the countries that a fixed exchange rate can be sustained. C. a lack of confidence that the U.S. can keep the price of gold in terms of the U.S. dollar fixed. D. a lack of confidence that competitive devaluations will not occur.

C. a lack of confidence that the U.S. can keep the price of gold in terms of the U.S. dollar fixed.

Beginning from internal and external​ balance, fiscal stimulus will A. cause the XX line to shift out. B. cause overemployment and a CA surplus. C. cause overemployment and a CA deficit. D. cause the II line to shift out.

C. cause overemployment and a CA deficit.

The​ price-specie-flow mechanism A. is the practice of selling domestic assets to prevent CA deficit. B. is a commitment by central banks to exchange currency for gold. C. restores external balances automatically. D. was established in 1900.

C. restores external balances automatically.

According to the proponents favoring the institutions of government as the decisive​ factor, A. the lack of instrumental variables measuring institutional quality is not a major critics against the theory as the case of​ China's institutional reform efforts has shown. B. the statistical evidence shown by the effect of mortality rat on the institutions governing property rights is sufficient to disprove the theory. C. the success of government in protecting private property rights is a key to economic growth. D. the negative association between lower corruption and higher​ per-capita income has demonstrated a clear proof for the theory.

C. the success of government in protecting private property rights is a key to economic growth.

A country is said to be in balance of payments equilibrium when A. the current plus capital account balance is financed entirely by official reserve movements without private international lending. B. the sum of its current and capital accounts equals the nonreserve component of net financial flows. C. the sum of its current and capital accounts comma less the nonreserve component of net financial flows comma equals zero. nothing D. the current plus capital account balance is financed by official reserve movements and private international lending.

C. the sum of its current and capital accounts comma less the nonreserve component of net financial flows comma equals zero. nothing

Can a government always collect more seignorage simply by letting the money supply grow​ faster? A. ​Yes, as long as the growth rate of money supply exceeds the​ people's expectation, it provides the government more resources for expenditure. B. ​No, if a higher monetary growth rate raises the real interest rate and reduces the real balances people are willing to​ hold, it may eventually lead to a fall in real seignorage. C. ​No, if a higher monetary growth rate raises the nominal interest rate and reduces the real balances people are willing to​ hold, it leads to a fall in real seignorage. D. ​Yes, as long as the growth rate of money supply does not alter the real interest​ rate, the nominal interest would not affect the real balances people are willing to hold.

C. ​No, if a higher monetary growth rate raises the nominal interest rate and reduces the real balances people are willing to​ hold, it leads to a fall in real seignorage.

Which of the following is NOT a clear lesson emerging from the 1990 Asian crisis and earlier​ developing-country crises in Latin America and​ elsewhere? A. A proper sequence of​ economic, financial and​ real, reform measures. B. An appropriate exchange rate system. C. A sound banking system as a key component of the entire financial structure. D. A relatively strong economic shield that provides the economy barriers from external shocks.

D. A relatively strong economic shield that provides the economy barriers from external shocks.

Why might corruption levels be correlated with GDP per​ capita? A. The inability of poor country governments to pay their public employees regularly makes taking bribes a key part of their pay. B. Corruption discourages investment and thus makes countries poorer. C. Excessive regulation in poor countries have helped make bribery a way of life in many poor countries. D. All of the above could be reasons for the connection of GDP per capita and corruption.

D. All of the above could be reasons for the connection of GDP per capita and corruption.

Why might corruption levels be correlated with GDP per​ capita? A. The inability of poor country governments to pay their public employees regularly makes taking bribes a key part of their pay. B. Excessive regulation in poor countries have helped make bribery a way of life in many poor countries. C. Corruption discourages investment and thus makes countries poorer. D. All of the above could be reasons for the connection of GDP per capita and corruption.

D. All of the above could be reasons for the connection of GDP per capita and corruption.

Suppose it is possible for a country to leave the euro zone and begin printing its own currency. Suppose also that there is some point at which the ECB​ (perhaps it is worried about financial​ losses) will stop lending to that​ country's banks. Which of the following would likely happen if creditors suddenly begin to flee from the​ country's banks? A. A weakened financial system and possible banking system collapse. B. A speculative attack against the home currency. C. A sharp economic contraction with eventual deflation. D. All of the above. E. A and B only.

D. All of the above.

Why would the failure to create a unified EU labor market be particularly harmful to the prospects for a smoothly functioning​ EMU, if at the same time capital is completely free to move among EU​ countries? A. Severe and persistent regional depressions could result if capital moves freely while labor does not. B. The economic stability loss a country experiences when joining may be exacerbated if labor and capital markets differ widely in terms of mobility. C. The cost of adjusting to product market shocks will​ increase, especially for countries where capital mobility is high relative to labor mobility. D. All of the above. E. A and B only.

D. All of the above.

What was NOT a motivating factor in the drive to start​ EMU? A. To avoid swings in the exchange rate that complicated the CAP. B. Turn the EU into a truly unified market. C. Enhance​ Europe's role in the world monetary system. D. All were reasons.

D. All were reasons.

Which of the following is NOT an example of equity finance in developing​ countries? A. Dell sets up a factory in the Philippines. B. An investment fund buys shares of Gasprom​ (a Russian natural gas​ corporation). C. Deutsche Bank opens a branch in India. D. An investment fund buys Argentinian government bonds.

D. An investment fund buys Argentinian government bonds.

During the speculative pressure on the EMS exchange rate mechanism​ (ERM) shortly before Britain allowed the pound to float in September​ 1992, the Economist​, a London weekly news​ magazine, opined as​ follows: The​ [British] government's critics want lower interest​ rates, and think this would be possible if Britain devalued​ sterling, leaving the ERM if necessary. They are wrong. Quitting the ERM would soon lead to​ higher, not​ lower, interest​ rates, as British economic management lost the degree of credibility already won through ERM membership. Two years ago British government bonds yielded three percentage points more than German ones. Today the gap is half a​ point, reflecting​ investors' belief that British inflation is on its way downlong dash permanently. ​(See ​"Crisis? What​ Crisis?" Economist​, August​ 29, 1992, p.51​.) a. Why might the British​ government's critics have thought it possible to lower interest rates after taking sterling out of the​ ERM? (Britain was in a deep recession at the time the article​ appeared.) A. The ERM set a very wide fluctuation margins for exchange rates of its member​ countries, which might have the source of​ Britain's high interest rates in the midst of her deep recession. B. The ERM might have enforced a high interest rate policy for its all members in order to maintain its system of exchange rate adjustments. C. A deep recession might have been caused by high interest rates. Taking sterling out of the ERM would automatically have lowered interst rates. D. As a member of​ ERM, British monetary authorities were obligated to maintain nominal interest rates at a level compatible with keeping the pound in the currency band. b. The Economist thought the opposite would occur soon after Britain exited the​ ERM, because: A. the writer believed in the Fisher effect that the higher the expected inflation the lower nominal interest rates. B. the market cridibility would be more important than the actual policies and leaving the EMS would wipe out the cridibility already won throught ERM membership. C. the devaluation of pound within the stipulated fluctuation margins was still possible without leaving the EMS. D. the writer believed that expected inflation will rise in Britain if it leaves the​ EMS, which will cause nominal interest rates to increase. c. Britain entered the ERM in October 1990. The ERM membership might have gained credibility for British policymakers​ because: A. the​ ERM's guidelines for exchange rate movements were broad enough for British policymakers to exercise their independent policies while being a member. B. maintaining the​ pound's value within the ERM was a sign that they were willing to allow the economy to go through the recession without resorting to a monetary expansion. C. the policymakers were willing to forsake thier independence and let the ERM dictate the economic policies. D. British policymakers lost their credibility before the membership and joining the ERM was the last resort. d. Which of the following is NOT a possible explanantion for a high level of British interest rates relative to German interest​ rates? A. According to the Fisherian​ relationship, a high future inflation in Britain relative to that in Germany is expected. B. More consistent monetary policies in Britain than in Germany. C. A relatively lower money supply growth in Britain than in Germany. D. A relatively higher money demand in Britain than in Germany. e. Which of the following may not be the reason why British interest rates might have been somewhat higher than German rates at the time of​ writing, despite the alleged​ "belief that British inflation is on its way down​ -- permanently?" A. German demand for money might have been higher than British demand. B. British output might have been relatively higher higher. C. British demand for money might have increased relatively more.

D. As a member of​ ERM, British monetary authorities were obligated to maintain nominal interest rates at a level compatible with keeping the pound in the currency band. D. the writer believed that expected inflation will rise in Britain if it leaves the​ EMS, which will cause nominal interest rates to increase. B. maintaining the​ pound's value within the ERM was a sign that they were willing to allow the economy to go through the recession without resorting to a monetary expansion. B. More consistent monetary policies in Britain than in Germany. A. German demand for money might have been higher than British demand.

The external debt buildup of some developing countries​ (such as​ Argentina) in the 1970s was in part due to​ (legal or​ illegal) capital flight in the face of expected currency devaluation.​ (Governments and central banks borrowed foreign currencies to prop up their exchange​ rates, and these funds found their way into private hands and into bank accounts in New York and​ elsewhere.) Since capital flight leaves a government with a large debt but creates an offsetting foreign asset for citizens who take money​ abroad, the consolidated net debt of the country as a whole does not change. What may be the consequence of debt problem for countries whose external government debt is largely the result of capital​ flight? A. Because the net debt remains the​ same, they do not have any further problems from capital flight. B. Capital flight may create income distribution problems if the government tries tax those who did not benefit from the opportunity to move funds out of the country. C. Capital flight leaves the government with the same amount of debt but may have a political instability resulting from the distorted income distribution. D. Capital flight exacerbates debt problems because the government is left holding a greater debt itself but may not be able to identify and tax the people who benefited from the capital movements.

D. Capital flight exacerbates debt problems because the government is left holding a greater debt itself but may not be able to identify and tax the people who benefited from the capital movements.

Which accurately describes world growth patterns in the​ 1960-2000 time​ period? A. No country in Latin America has grown successfully throughout this​ period, making it a series of​ "lost decades" for these countries. B. Richer African countries in 1960​ (such as​ Senegal) have grown much faster than other countries in​ Africa, causing wide disparities. C. On​ average, industrialized countries in Europe have grown faster than countries in any other region of the world. D. East Asian countries have gone from being lower middle class countries to being richer in some cases than many European countries.

D. East Asian countries have gone from being lower middle class countries to being richer in some cases than many European countries.

Why would we expect convergence of living standards across​ countries? A. If countries​ trade, they get to consume the same products. B. There is automatically a convergence in labor force participation rates once a country is relatively advanced. C. Once a country has a GDP per capita over​ $20,000 a​ year, their growth rate automatically begins to​ slow, allowing others to catch up. D. If countries trade goods and​ assets, capital and technology can flow to where they are needed the​ most, roughly equilibrating GDP per capita.

D. If countries trade goods and​ assets, capital and technology can flow to where they are needed the​ most, roughly equilibrating GDP per capita.

Which is NOT a likely consequence of a developing​ country's decision to reduce trade restrictions such as import tariffs regarding its ability to borrow in the world capital​ market? A. By making the economy more open to​ trade, liberalization is likely to enhance a developing​ country's ability to borrow abroad. B. Making the economy more open to trade will lead prospective lenders to expect a higher export level and an increased ability to service its debts in the future. C. Combined with a set of policies which international lenders consider​ sound, the decision will improve​ lenders' assessment of the​ country's credit-worthiness. D. Less government interventions imply an increased penalty for​ default, which will further intimidate potential lenders to provide capital to the country as a whole.

D. Less government interventions imply an increased penalty for​ default, which will further intimidate potential lenders to provide capital to the country as a whole.

There are a few clear lessons emerging from the 1990 Asian crisis and earlier​ developing-country crises in Latin America. Which of the following country cases does NOT belong to the case of an inappropriate exchange rate​ regime? A. Argentina in the 1980s B. South Korea in 1997 C. Thailand in the late 1990s D. Mexico in the 1990s

D. Mexico in the 1990s

Why did the Asian​ crisis, not earlier crises of the​ 1990s, prompt the recent discussion of reforming the​ world's financial​ architecture? A. The crisis demonstrated that a country can not be vulnerable as long as the international financial architecture was firmly in place and the fundamentals of its real economy are sound. B. The Asian economic role in the international trade and finance became increasingly more important. C. The Asian crisis was more pronounced and wide spread than the other crises. D. The crisis has shown that the apparent strength of contagion through the international capital markets was much more severe.

D. The crisis has shown that the apparent strength of contagion through the international capital markets was much more severe.

In some emerging market​ economies, not only are debt obligations to foreigners denominated in​ dollars, so are many of the​ economies' internal​ debts, that​ is, debts of one domestic resident to another. This phenomenon is sometimes called liability dollarization. How might liability dollarization worsen the financial market disruption caused by a sharp depreciation of the domestic currency against the​ dollar? A. The depreciation affects only participants in global financial markets. B. Some domestic borrowers might become insolvent after devaluation but the financial system is immune from any further effect from the internal debts. C. The risks from devaluation to emerging​ markets' borrowing, an outcome of original​ sin, applies only to debt obligations to foreigners. D. The exchange risk applies to all debts denominated in dollars and depreciation can have far more widespread effects throughout the economy.

D. The exchange risk applies to all debts denominated in dollars and depreciation can have far more widespread effects throughout the economy.

Today's world is characterized by a vast international dispersion in levels of income and​ well-being, which contradicts the simple theory of convergence. Which of the following statements describes the apparent failure of the​ theory? A. The fundamental assumptions of the hypotheses are erroneous. B. Because of low marginal products of investment in developing​ countries, the​ low-income countries tend to grow more slowly than rich ones. C. Some developed countries usurped the major portion of the​ world's available current account​ surpluses, thereby limiting the flow of capital to developing countries. D. The high risks of investing in many developing countries are the primary reasons for the failure of the model.

D. The high risks of investing in many developing countries are the primary reasons for the failure of the model.

Which of the following weaknesses of East Asian development became apparent with the 1997​ crisis? A. Overly stringent bankruptcy laws. B. Irresponsible fiscal policies of goverments. C. An increase in​ productivity, but not in the saving rate. D. The poor state of banking regulation.

D. The poor state of banking regulation.

What was the key document that set out a plan towards a European Monetary​ Union? A. Delores Report B. Single European Act C. Bretton Woods Agreement D. the Maastricht Treaty

D. the Maastricht Treaty

Norway pegs to the​ euro, but soon​ after, EMU benefits from a favorable shift in the world demand for​ non-Norwegian EMU exports. This causes the exchange rate of the Norwegian krone against​ non-euro currencies A. to be unaffected. B. to depreciate. C. either to appreciate or to​ depreciate, depending upon Norwegian current account balances with each of the​ non-euro currencies. D. to appreciate. How would this affect​ Norway? A. Norwegian output decreases. B. There is no direct effect on Norwegian economy. C. Norwegian output increases. D. Norwegian current account against​ non-euro countries improves. The size of this effect is ▼ the greater the volume of trade between Noway and other​ Euro-zone countries​ (and therefore the ▼ larger smaller the proportion of trade between Norway and​ non-euro-zone countries).

D. to appreciate. A. Norwegian output decreases. smaller smaller

In the EMS before September 1992 the​ lira/DM exchange rate could fluctuate by up to 2.25 percent up or down. Assume that the​ lira/DM central parity and band were set in this way and could not be changed. In this​ case, the maximum possible difference between the interst rates on ​one-year lira and DM deposits would have been 4.50 percent. The maximum possible difference between the interst rates on six​-month lira and DM deposits would have been 9.00 percent. On​ three-month deposits, 19.25 percent. Imagine that in Italy the interest rate on​ five-year government bonds was 11 percent per​ annum; in Germany the rate on​ five-year government bonds was 8 percent per annum. What would have been the implications for the credibility of the current​ lira/DM exchange​ parity? A​ three-percent difference on the annual rate of a​ five-year bond means a difference of 1.03 Superscript 5 Baseline equals 1.159 ​, which was far above the amount that would be consistent with the maintenance of the EMS bands​ (4.5%). Do your answers to the last two questions require an assumption that interest rates and expected exchange rate changes are linked by interest​ parity? Why or why​ not? A. ​No, because the EMS had many other policy tools to maintain the​ exchange-rate differencials among its members which did not have to be consistent with interest parity. B. ​No, because the EMS was operated under the strict condition of capital control among its initial members. C. The answer must be​ "Uncertain." There are many factors that are left out of the basic interest parity such as capital​ control, the immobility of productive​ factors, and trade regulations. D. ​Yes, because this condition links thr returns on assets denominated in different currencies.

D. ​Yes, because this condition links thr returns on assets denominated in different currencies. 4.50 9.00 19.25

1.) Using the line drawing tool​, show the impact of a rise in export demand under a floating exchange rate regime. Properly label this line. ​2.) Using the point drawing tool​, show the new point of equilibrium. Carefully follow the instructions above and only draw the required objects.

DD2 below DD1

Imagine that a single large country within the euro​ area, for​ example, Germany, carries out a fiscal​ expansion, in which its government purchases more of its own​ country's output. What would be the effect on the other members of the euro​ area? Start by using the​ DD-AA ​model, considering the euro area to be a single economy with an exchange rate that floats against the rest of the world. ​First, show the effects of Germany buying more of its own​ country's output assuming the change is permanent. ​1.) Using the line drawing​ tool, draw a new AA curve showing the effects of​ Germany's actions. Label this ​'AA squared ​.' ​2.) Using the line drawing tool​, draw a new DD curve showing the effects of​ Germany's actions. Label this ​'DD squared ​.' ​3.) Using the point drawing tool​, indicate the new market equilibrium. Label this ​'e 2 ​.' Carefully follow the instructions​ above, and only draw the required objects. Consider the channels though which the German policy change could affect other currency union members if the change is permanent. The more trade other euro zone countries​ have, the ▼ stronger weaker the ▼ positive negative effects on output and prices. What if the fiscal expansion is only​ temporary? ​1.) Using the line drawing tool​, draw a new DD curve showing the effects of​ Germany's actions. Label this ​'DD squared ​.' ​2.) Using the point drawing tool​, indicate the new market equilibrium. Label this ​'e 2 ​.' Carefully follow the instructions​ above, and only draw the required objects. Now imagine that the euro area is in a liquidity​ trap, with the ECB policy rate fixed at zero. How do you think a temporary German fiscal expansion affects other currency union​ members? If the euro zone is in a liquidity​ trap, then a temporary fiscal expansion may ▼ decrease increase employment if the region is initially along the flat portion of the AA curve. What about a permanent​ expansion? A permanent fiscal expansion may ▼ mitigate exacerbate the liquidity trap.

DD2 shift right AA2 shift down (make sure Y1 doesnt change) stronger negative DD2shift right e2 move down AA1 curve increase exacerbate

In the spring of 2013 Cyprus followed​ Greece, Ireland,​ Portugal, and Spain in agreeing on an emergency loan from the troika of the​ EU, ECB, and IMF. The cause was big losses in the Cypriot banking system. After imposing losses on some Cypriot bank​ deposits, the​ government, with EU​ approval, imposed capital controls to prevent residents from taking money abroad. Why do you think this step​ (which violated the​ EU's single-market​ philosophy) was​ taken? A. To forestall a run on the​ country's banks. B. To enable the government to extract taxes on​ residents' money. C. To prevent a collapse of its banking sector. D. All of the above. E. A and C only.

E. A and C only.

Suppose the production function for aggregate output in the United States is the same as in​ India, Upper Y equals Upper A Upper K Superscript alpha Baseline Upper L Superscript 1 minus alpha ​, where A is the total productivity​ factor, K is the capital​ stock, and L is the supply of labor. In​ 2010, India and the United States had per capita incomes​ of, respectively,​ $3,413 and​ $41,858. From these values it can be determined that the ratio of per capita income ​(​Y/L) in India to that of the United States in 2010 was nothing . ​(Round your answer to three decimal​ places.) Using this information and letting the​ capital-labor ratio in India and the United States be​ given, respectively, as k Subscript Upper I and k Subscript US ​, an expression giving the ratio of​ capital's marginal product in India to its marginal product the U.S.​ (the marginal product of capital is given by alpha Upper A Upper K Superscript alpha minus 1 Baseline Upper L Superscript 1 minus alpha ​) is A. 0.082 times ​(k Subscript US​/k Subscript Upper I ​) B. 12.184 times ​(k Subscript US​/k Subscript Upper I ​) C. 12.184 times ​(k Subscript Upper I​/k Subscript US ​) D. 0.082 times ​(k Subscript Upper I​/k Subscript US ​) The answer to the previous question ▼ contradicts supports the Lucas puzzle LOADING... of capital flows from rich to poor countries since it suggests that a lower​ capital-labor ratio ▼ unambiguously doesn't necessarily ​mean(s) a higher MPK. In order to make the marginal product of capital the same in the two​ countries, total factor productivity in India ​(Upper A Subscript Upper I ​) relative to its value for the U.S. ​(Upper A Subscript US ​) must equal A. left parenthesis k Subscript Upper I Baseline divided by k Subscript US Baseline right parenthesis B. left parenthesis k Subscript US Baseline divided by k Subscript Upper I Baseline right parenthesis Superscript 1 minus alpha C. left parenthesis k Subscript Upper I Baseline divided by k Subscript US Baseline right parenthesis Superscript 1 minus alpha D. left parenthesis k Subscript Upper I Baseline divided by k Subscript US Baseline right parenthesis Superscript alpha

Simply divide​ $3,413 by​ $41,858 and round to three decimal places. =.082 A. 0.082 times ​(k Subscript US​/k Subscript Upper I ​) supports doesn't necessarily C. left parenthesis k Subscript Upper I Baseline divided by k Subscript US Baseline right parenthesis Superscript 1 minus alpha

Real-Time Data Analysis​ Exercise* ​*Real-time data provided by Federal Reserve Economic Data​ (FRED), Federal Reserve Bank of Saint Louis. Using data from the St. Louis Federal Reserve​ Bank, examine the current account balance​ (as a percent of​ GDP) for​ Greece, Spain,​ Portugal, Italy, and Ireland after 2009 during the euro crisis. A graph showing the current account balance​ (as a percent of​ GDP) for Greece can be viewed at FRED. LOADING... According to this​ graph, during the​ 2-3 year period after 2009 when the euro crisis was​ pronounced, the economy of Greece experienced ▼ a decrease an increase in the ratio of its Current Account to its GDP. Now look at the current​ account-to-GDP ratios for​ Spain, Portugal,​ Italy, and Ireland. LOADING... For each of these four countries​ individually, the current​ account-to-GDP ratio in the period after 2009 A. showed no discernable pattern. B. exhibited a marked difference to that seen for Greece. C. behaved similar to that seen for Greece. D. None of the above. For these five​ countries, the post 2009 pattern in their current​ account-to-GDP ratios can be primarily explained by A. their successful efforts to boost exports in the aftermath of the global recession. B. the severe contractions they somewhat​ self-induced, with output sharply declining​ and, consequently, imports too. C. the refusal of their euro partners to provide financial assistance during the crisis. D. All of the above.

an increase C. behaved similar to that seen for Greece. B. the severe contractions they somewhat​ self-induced, with output sharply declining​ and, consequently, imports too.

Assume that a​ country's inflation was 100 percent per year in both 1990 and 2000 but that inflation was falling in the first year and rising in the second. Other things being​ equal, seignorage revenue in 1990 was ▼ higher than lower than equal to that in 2000.

higher than

Assume that a​ country's inflation was 100 percent per year in both 1990 and 2000 but that inflation was falling in the first year and rising in the second. Other things being​ equal, seignorage revenue in 1990 was ▼ lower than equal to higher than that in 2000.

higher than

When a country has more unstable money​ demand, its AA schedule is subject to ▼ smaller larger shifts and hence its output will be ▼ smaller larger . The country with the more unstable money​ demand, therefore, would benefit ▼ less more from a policy rule under which authorities offset shifts in money demand. In terms of ​GG-LL​ diagram, how would an increase in the size and frequency of unexpected shifts in a​ country's money demand function affect the level of economic integration with a currency area at which the country will wish to​ join? A. Its GG schedule would shift up and to the left and hence the country would find it advantageous to join a currency union at a lower level of economic integration. B. Its LL schedule would shift down and to the left and hence the country would find it advantageous to join a currency union at a lower level of economic integration. C. Its GG schedule would shift down and to the right and hence the country would find it advantageous to join a currency union at a higher level of economic integration. D. Its LL schedule would shift up and to the right and hence the country would find it advantageous to join a currency union at a higher level of economic integration.

larger larger more B. Its LL schedule would shift down and to the left and hence the country would find it advantageous to join a currency union at a lower level of economic integration.