ECON305 chap 17&18

there is ____ correlation between foreign income and exports

a positive

Professor Blanchard explains how expansionary monetary policy in advanced economies can cause investors​ "to look for other places to​ go." Such accommodative monetary policy in advanced economies would then be expected to have which of the following​ effects?

a reduction in the policy rate in advanced economies and capital inflows for emerging market economies

Macroeconomic crises can result under fixed exchange rate policies. When a country pegs their nominal exchange rate to the currency of a country with lower​ inflation, it may lead​ to: If the above scenario were to escalate so that financial investors believed a devaluation was​ inevitable, the central bank would be forced to ___________ maintain existing parity

a steady real appreciation and a steady worsening of the trade position. increase interest rates

An increase in government spending leads to _________ in output and increases trade _____________ The effect of government spending on output in an open economy is ________________ than it would be in a closed economy.

an increase deficit smaller than

Which of the following best explains reasons to devalue in the short run even when economies tend to return to their natural level of output in the medium​ run?

any factor that moves the expected future exchange​ rate, Upper E Subscript t plus n plus 1 Superscript e, moves the current exchange​ rate, Upper E Subscript t.

In an​ economy, saving (S​) is 382, taxes (T​) are 593, government spending (G​) is 584 and investment (I​) is 267. A deterioration in the government budget balance of 50 must be reflected​ in:

any of the above

The real exchange rate appreciates when:

either the nominal exchange rate increases and/or the ratio of domestic to foreign prices increases.

If the dollar is expected to appreciate against the​ yen, uncovered interest parity implies that the U.S. nominal interest rate must be greater than the Japanese nominal interest rate.

false

Opening the economy to trade tends to increase the multiplier because an increase in expenditure leads to more exports

false

The fact that a rich country like Japan has such a small ratio of imports to GDP is clear evidence of an unfair playing field for U.S. exporters to Japan.

false

The nominal exchange rate and the real exchange rate always move in the same direction

false

The nominal exchange rate in this chapter is defined as the domestic currency price of a unit of foreign currency.

false

Uncovered interest parity implies that interest rates must be the same across countries.

false

The national income identity implies that budget deficits cause trade deficits.

false. An increase in the budget deficit will lead to an increase in the trade​ deficit, but we​ can't conclude that from the national income accounting identity. We have to use our model to make that prediction.

The current U.S. trade deficit is the result of unusually high​ investment, not the result of a decline in national saving.

false. The current account deficit can result from unusually high investment or unusually low saving or a combination of both. The U.S. current account deficit is the result of unusually low saving.

​Britain's return to the gold standard caused years of high​ unemployment, because

the return implied a large real appreciation of the currency. This meant British goods became more expensive relative to foreign​ goods, resulting in the IS curve shifting to the left as net exports decreased.

If the trade deficit is equal to​ zero, then the domestic demand for goods and the demand for domestic goods are equal.

true

The Marshall-Lerner condition is the condition under which a real depreciation (a decrease in ε) leads to an increase in net exports (NX).

true

The experience of the United States in the 1980s shows that real exchange rate appreciations lead to trade deficits and real exchange rate depreciations lead to trade surpluses.

true

The nominal exchange rate and the real exchange rate usually move in the same direction.

true

if there are no statistical​ discrepancies, countries with current account deficits must receive net capital inflows.

true

Assuming that the current account balance ​(CA​) and trade balance ​(NX​) move closely​ together, the impact on the trade balance of an increase in saving of ​$74 billion and a decrease in investment of ​$39 billion is ___

$113 billion. (add them)

If a country faces a capital account​ deficit, then which of the following measures should be taken to reach a​ balance?

A deterioration of the current account balance. ​Initially, the country was in capital account deficit i.e. the country used to lend to the rest of the world and​ hence, it had a current account surplus. A deterioration of the current account balance means people will save less and invest more.​ Hence, the country borrows from abroad or lends less and this will help lead to a balance of the capital account.

Which of the following does not explain why there is less agreement on whether Europe constitutes an optimal currency​ area?

A devaluation of the right size can take the economy quickly to the natural level.

Consider an open economy with flexible exchange rates. Given the discussion of the effects of fiscal policy in this​ chapter, how does a foreign fiscal expansion affect domestic output if the domestic Central Bank does not change the policy​ rate? Given the discussion of the effects of monetary policy in this​ chapter, how does a foreign monetary expansion affect domestic​ output?

A foreign fiscal expansion is likely to increase domestic output. A foreign monetary expansion has an ambiguous effect on domestic output.

Assuming the​ Marshall-Lerner condition is​ satisfied, which of the following policy decisions will increase both production ​(Y​) and total net exports ​(NX​)?

A reduction in the real exchange rate will help on both the trade and the output fronts. It reduces the trade deficit and increases output. Depending on the initial situation and the relative effects of the depreciation on output and trade​ balance, the government may need to complement the depreciation with either an increase or a decrease in government spending.

Which of the following statements is true? A: If there are no statistical discrepancies, countries with current account surpluses must receive net capital inflows B: If there are no statistical discrepancies, countries with current account deficits must receive net capital inflows. C: Statistical discrepancies are always positive for countries with current account surpluses D: Statistical discrepancies are always positive for countries with current account deficits. E: The current account and the capital account always add up to zero in practice.

B

The table below lists factors that affect net exports ​(NX​). For each factor indicate if an increase in that factor increases​ (I) net exports or decreases​ (D) net exports. __________ domestic output y __________ foreign output y* __________ exchange rate e When there is no​ inflation, neither actual nor​ expected, then:

D I D i=r

In an​ economy, saving ​(S​) is 280280​, taxes ​(T​) are 632632​, government spending ​(G​) is 696696 and investment ​(I​) is 258258. A deterioration in the government budget balance of 4848 must be reflected​ in: A. a revised current account balance ​(CA​) to negative 90−90. B. an increase in private saving ​(S​) to 328328. C. a decrease in investment ​(I​) of 4848. D. any of the above.

D.

If following a current account​ surplus, the government resorts to currency appreciation, then there will be a decrease in investments less than the decrease in savings.

Following the current account​ surplus, the government will appreciate the​ currency, due to which there is a fall in demand for domestic goods as they become more expensive.​ Hence, there is an increase in imports leading to a current account deficit and a decrease in investment less than the decrease in savings.

If the trade deficit is equal to zero ​(mark all that​ apply)

Imports are equal to exports Demand for domestic goods is equal to domestic demand for goods

if the trade deficit is equal to zero

Imports are equal to exports. Demand for domestic goods is equal to domestic demand for goods.

Initially, a depreciation in the real exchange rate ​(ε​) may cause net exports ​(NX​) to decline as the effect of the depreciation is reflected much more in prices than in quantities. Over​ time, the trade balance improves beyond its initial level because foreign buyers respond to the decrease in export prices. The above scenario can be graphically explained by graphing net exports over time. This representation is referred to as the​ ____.

J-Curve

The interest parity equation implies that

Labor mobility is high in Europe and European countries have experienced very similar shocks in the past.

Which of the following best explains why a fiscal expansion tends to decrease net​ exports?

Net​ exports, NX​ = NX​(Y​, ​Y*​, E​), depend negatively on domestic​ output, Y​, and positively on the exchange​ rate, E. An expansionary fiscal policy leads to an increase in output but has no impact on the exchange rate.​ Therefore, net exports decrease.

Professor Blanchard discusses inflation in Spain and in the Eurozone. He states that macroeconomic adjustments in Spain would be easier if inflation in the Eurozone were higher​ because

Spain would not need to rely on deflation to become more competitive.

________ in the real exchange rate will have the same effect on the trade balance as an increase in foreign output ​(Y*​).

a decrease

Suppose the domestic currency depreciates ​(E​ falls). Assume that P and ​P* remain constant. Which of the following is​ true? As a​ result, what will happen to the world demand for domestic​ goods? What does this imply about the domestic unemployment​ rate?

The relative price of domestic goods falls; World demand for domestic goods will rise; The domestic unemployment rate will fall in the short run.

Suppose Country A witnesses an increase in the price of imports and no significant change in exports.​ However, over​ time, there is a substantial improvement in the trade balance. Which of the following could be a possible reason for such an effect on trade​ balance?

There is a currency depreciation and the​ Marshall-Lerner condition holds later.

Suppose Country A witnesses an increase in the price of imports and no significant change in exports.​ However, over​ time, there is a substantial improvement in the trade balance. Which of the following could be a possible reason for such an effect on trade​ balance? The part of Graph A which indicates the lag in the response of the trade balance to changes in the real exchange rate is ____. This time lag will cause ________ in the output initially followed by ______________ in output eventually.

There is a currency depreciation and the​ Marshall-Lerner condition holds later. BC a decrease an increase

Consider an economy with a trade deficit ​(NX<​0) and with output equal to its natural level. Suppose​ that, even though output may deviate from its natural level in the short​ run, it returns to its natural level in the medium run. Assume that the natural level is unaffected by the real exchange rate. What must happen to the real exchange rate over the medium run to eliminate the trade deficit​ (i.e., to increase NX to​ 0)? Consider national income​ identity: Y​ = C+I+G+NX. Assume again that output returns to its natural level in the medium run. If NX increases to​ 0, what must happen to domestic demand in the medium​ run? What government policies are available to reduce domestic demand in the medium​ run?

There must be a real depreciation; Domestic demand must fall; Either reduce G​, or increase T​, or both

If domestic inflation is higher than foreign​ inflation, but the domestic country has a fixed exchange​ rate, what happens to the real exchange rate over​ time? Assume that the​ Marshall-Lerner condition holds. What happens to the trade balance over​ time?

There will be real appreciation over time; The trade balance will worsen.

A country can have a current account deficit and no trade deficit.

True. The current account is made up of the trade balance, the net income balance and net transfers received. If the sum of the net income balance and net transfers received is negative as a whole, the current account can be in deficit if even if the trade balance is zero.

A decrease in production ​(Y​) can improve the trade​ balance; exports may remain unchanged but imports decrease.

When a​ country's output​ decreases, exports, which depend on what happens in the rest of the​ world, may remain the same.​ However, imports come down with​ output, and the trade balance improves

The current exchange rate for a domestic country would likely increase for all of the following reasons​ except: A Congressional decision to fund ten new​ R&D facilities throughout the Midwest would most likely result in ______________ an increase a decrease in the real exchange rate.

a decrease in expected domestic interest rates. an increase

There is ____ correlation between the real exchange rate and exports.

a negative

An increase in the domestic interest rate relative to the foreign interest rate leads to​ _______.

an appreciation

Flexible exchange​ rates, it was once​ thought, would bring more stability to the market.​ Instead, volatility and large fluctuations exist. If investors expected a decrease of 5% in interest rates for 3​ years, but rates were only decreased 2% for years 2 and​ 3, __________ would occur

an appreciation

A decrease in the real exchange rate leads to _____ in imports

an decrease

An increase in domestic income leads to ____ in imports

an increase

An increase in domestic income leads to _____________ in imports. A decrease in the real exchange rate leads to __________ in imports. There is _____________ correlation between foreign income and exports. There is _______________ between the real exchange rate and exports.

an increase a decrease a positive a negative correlation

The equilibrium level of output ____ the same as the level of output at which trade is balanced.

could be

Given the interest parity condition​ the demand for domestic bonds would _____________ if domestic interest rates decreased.

decrease

Over​ time, the trade balance improves beyond its initial level because foreign buyers respond to the ___________ in export prices

decrease

A budget deficit, everything else constant, will lead to a(n) _______ in national savings. This will, everything else constant, lead to a ________. This means the country will become a ______ with the rest of the world .

decrease; current account deficit; net debtor.

An increase in government spending leads to an increase in output and increases trade ____

deficit

The goods market of an open economy is in equilibrium when domestic output or production​ is:

equal to the demand for domestic goods.

the ​"sum of the current account​ balances" in the​ world:

equal zero

A real appreciation means that domestic goods become less expensive relative to foreign goods.

false

A real depreciation leads to an immediate improvement in the trade balance.

false

Although the export ratio can be larger than one—as it is in Singapore—the same cannot be true of the ratio of imports to GDP.

false

Given the definition of the exchange rate adopted in this​ chapter, if the dollar is the domestic currency and the euro the foreign​ currency, a nominal exchange rate of 0.75 means that 0.75 dollars is worth 0.75 euros.

false

If the dollar is expected to depreciate against the​ yen, uncovered interest parity implies that the U.S. nominal interest rate will be _______ than the Japanese nominal interest rate.

higher

An appreciation of the exchange rate, holding everything else constant, will lead to:

higher imports and lower exports, reducing the trade balance.

Given the real exchange​ rate, you can expect the relative price of domestic goods in terms of foreign goods to _____ when the foreign price level decreases.

increase

Given the real exchange​ rate, epsilon = EP Over Upper P star, you can expect the relative price of domestic goods in terms of foreign goods to __________ when the foreign price level decreases. _____________ in the real exchange rate will have the same effect on the trade balance as an increase in foreign output ​(Upper Y star).

increase a decrease

A decrease in the real exchange rate can ________________ savings by increasing ___________

increase output

Consider an open economy with flexible exchange rates. Given the discussion of the effects of fiscal policy in this​ chapter, if the Central Bank does not change the policy​ rate, a foreign fiscal expansion is likely to​ __________. Given the discussion of the effects of monetary policy in this​ chapter, a foreign monetary expansion is likely to​ __________.

increase foreign output and not change the foreign exchange rate increase foreign output and decrease the foreign interest rate

As domestic output increases, imports _____, and exports _______, so net exports _______.

increase; are unaffected; decrease.

Under fixed exchange​ rates, the money supply

is not a policy tool of the central bank.

Opening the economy to trade tends to

lower the multiplier because an increase in expenditure leads to more imports

In the short​ run, all of the following are disadvantages of a fixed exchange rate regime​ except: According to Robert​ Mundell, for countries to constitute an optimal currency​ area, such as adopting a common​ currency, they must​ have:

open market operations are overused high factor mobility

A decrease in the real exchange rate can increase savings by increasing ______

output

Initially, a depreciation in the real exchange rate (epsilon) may cause net exports ​(NX​) to decline as the effect of the depreciation is reflected much more in ___________ than in ___________

prices quantities

A small open economy can reduce its trade deficit through fiscal contraction at a smaller cost in output than can a large open economy.

true

The effect of government spending on output in an open economy is _____ than it would be in a closed economy

smaller than

In an open​ economy, you must differentiate between the demand for domestic goods and the domestic demand for goods​ by:

subtracting the value of imports in terms of domestic goods.

An expansionary fiscal policy has a greater effect on output in an economy with fixed exchange rates than in an economy with flexible exchange​ rates, because

the central bank must increase the money supply in order to accommodate the increase in demand for money caused by an increase in output and prevent the currency from appreciating.

Uncovered interest parity implies

the domestic interest rate is equal to the foreign interest rate plus the expected rate of domestic currency depreciation

Professor Blanchard discusses the slowdown in growth in emerging market economies. He attributes part of this slowdown to a​ "trade effect." This trade effect represents which of the​ following?

the effects of the slowdown in growth in advanced economies which causes a reduction in emerging market​ economies' exports

In an open​ economy, monetary policy works through the effect of the interest rate​ on: If interest rates are decreased in an open​ economy, which of the following is the correct sequence of resulting​ events?

the exchange rate. LM​ decreases; output ​(Y​) ​increases; exchange rate ​(E​) decreases

The current account balance and ____________ typically move closely together

the trade balance

The current account balance and the ______ typically move closely together.

trade balance

A decline in real income can lead to a decline in imports and thus a trade surplus.

true

Which of the following is​ possible? ​(Mark all that​ apply.)

​Exports/GDP > 1 Net Exports​ < 0 ​Imports/GDP > 1

The above scenario can be graphically explained by graphing net exports over time. This representation is referred to as the​ _________.

​J-Curve