Question 1

The amount of price inflation that the economy experiences eventually depends on the size of the spending multiplier.

Accepted Answer

A) True 
 B)False  False

Question 2

The LM curve has a:

Accepted Answer

A) positive slope because a higher interest rate leads to a decrease in the demand for money and thus a higher level of domestic production is needed to cause people to continue to hold the same amount of money. 
B) negative slope because a lower interest rate leads to an increase in the demand for bonds and thus a higher level of domestic production is needed to cause people to continue to hold the same amount of money. 
C) negative slope because a lower interest rate leads to a decrease in foreign investments and thus a higher level of domestic production is needed for equilibrium. 
D) positive slope because a higher interest rate leads to a higher incentive to hold money and thus a higher money supply is needed for equilibrium. 
A) positive slope because a higher interest rate leads to a decrease in the demand for money and thus a higher level of domestic production is needed to cause people to continue to hold the same amount of money. 
B) negative slope because a lower interest rate leads to an increase in the demand for bonds and thus a higher level of domestic production is needed to cause people to continue to hold the same amount of money. 
C) negative slope because a lower interest rate leads to a decrease in foreign investments and thus a higher level of domestic production is needed for equilibrium. 
D) positive slope because a higher interest rate leads to a higher incentive to hold money and thus a higher money supply is needed for equilibrium. A

Question 3

The greater the degree of international capital mobility:

Accepted Answer

A) the further to the right is the FE curve. 
B) the further to the left is the FE curve. 
C) the steeper is the FE curve. 
D) the flatter is the FE curve. 
A) the further to the right is the FE curve. 
B) the further to the left is the FE curve. 
C) the steeper is the FE curve. 
D) the flatter is the FE curve. D

Question 4

A vertical FE curve indicates perfect capital mobility.

Accepted Answer

A) True 
 B)False

Question 5

The official settlements balance _____ if the IS-LM intersection is _____ the FE curve.

Accepted Answer

A) is in surplus; on 
B) is in surplus; to the right of 
C) is in deficit; to the left of 
D) has a zero value; on 
A) is in surplus; on 
B) is in surplus; to the right of 
C) is in deficit; to the left of 
D) has a zero value; on

Question 6

When taking into account foreign-income repercussions, the spending multiplier is:

Accepted Answer

A) smaller because an increase in domestic imports causes current account deficit. 
B) larger because an increase in domestic imports causes foreign income to rise and thus boosts domestic exports. 
C) smaller because an increase in domestic imports lowers the growth in the domestic exports. 
D) larger because an increase in domestic imports causes a surplus in the official settlements balance. 
A) smaller because an increase in domestic imports causes current account deficit. 
B) larger because an increase in domestic imports causes foreign income to rise and thus boosts domestic exports. 
C) smaller because an increase in domestic imports lowers the growth in the domestic exports. 
D) larger because an increase in domestic imports causes a surplus in the official settlements balance.

Question 7

The greater the marginal propensity to import:

Accepted Answer

A) the smaller the spending multiplier. 
B) the greater the level of investment. 
C) the greater is the net export. 
D) the smaller is the level of consumption. 
A) the smaller the spending multiplier. 
B) the greater the level of investment. 
C) the greater is the net export. 
D) the smaller is the level of consumption.

Question 8

Real domestic investment spending is:

Accepted Answer

A) positively related to the marginal propensity to consume. 
B) negatively related to the level of interest rates in the economy. 
C) positively related to government spending. 
D) negatively related to the exchange rate. 
A) positively related to the marginal propensity to consume. 
B) negatively related to the level of interest rates in the economy. 
C) positively related to government spending. 
D) negatively related to the exchange rate.

Question 9

The LM curve illustrates all combinations of domestic output levels and interest rates for which:

Accepted Answer

A) the domestic product market is in equilibrium. 
B) the domestic money market is in equilibrium. 
C) there is a zero balance for the country's official settlements balance. 
D) there is full employment. 
A) the domestic product market is in equilibrium. 
B) the domestic money market is in equilibrium. 
C) there is a zero balance for the country's official settlements balance. 
D) there is full employment.

Question 10

Suppose the United States' imports substantially affect foreign incomes, and the foreign countries import from the United States. The United States' spending multiplier will exceed the spending multiplier for a comparable small open economy.

Accepted Answer

A) True 
 B)False

Question 11

The European Union has relatively large production and income effects on Africa.

Accepted Answer

A) True 
 B)False

Question 12

If C represents aggregate consumption, Id represents domestic investments, G represents government expenditures, E represents national expenditures on goods and services, X represents foreign demands for exports, and M represents domestic demand for imports, then aggregate demand in an economy equals:

Accepted Answer

A) C + Id + G. 
B) E + C + Id + (X - M). 
C) C + Id + G + (X - M). 
D) C + Id + G + (M - X). 
A) C + Id + G. 
B) E + C + Id + (X - M). 
C) C + Id + G + (X - M). 
D) C + Id + G + (M - X).

Question 13

Expansionary fiscal policy will cause the IS curve to shift to the right.

Accepted Answer

A) True 
 B)False

Question 14

Equilibrium GDP in the short-run is determined at the point where:

Accepted Answer

A) gross domestic production equals aggregate demand. 
B) domestic production equals domestic consumption. 
C) imports equal exports. 
D) the rate of unemployment equals zero. 
A) gross domestic production equals aggregate demand. 
B) domestic production equals domestic consumption. 
C) imports equal exports. 
D) the rate of unemployment equals zero.

Question 15

The volume of imports is positively related to real national production and income. What are two reasons for this relationship?

Accepted Answer

The relationship can be represented as M

Question 16

The goal of internal balance includes:

Accepted Answer

A) growth stability. 
B) full employment of resources. 
C) a reasonable and sustainable balance of payments with the rest of the world. 
D) exchange rate stability. 
A) growth stability. 
B) full employment of resources. 
C) a reasonable and sustainable balance of payments with the rest of the world. 
D) exchange rate stability.

Question 17

If the marginal propensity to save is 0.3 and the marginal propensity to import is 0.2, then value of the simple spending multiplier is:

Accepted Answer

A) 2.0. 
B) 0.5. 
C) 1.5. 
D) 0.1. 
A) 2.0. 
B) 0.5. 
C) 1.5. 
D) 0.1.

Question 18

Which of the following is likely to have the most effect on a country's demand for imports?

Accepted Answer

A) Foreign income 
B) Prices of domestic products relative to the prices of foreign products 
C) The volume of the country's exports 
D) The change in the country's official settlements balance 
A) Foreign income 
B) Prices of domestic products relative to the prices of foreign products 
C) The volume of the country's exports 
D) The change in the country's official settlements balance

Question 19

In your opinion do government policies to stabilize real domestic production have a larger role to play in the IS-LM-FE model or in the monetary approach to the balance of payments? Why? (Note: This question is an extension of the analysis. It is not covered explicitly in the book.)

Accepted Answer

In the IS-LM-FE model, there is a role t

Question 20

Fiscal policy consists of:

Accepted Answer

A) changes in money supply and interest rates. 
B) changes in government expenditures and taxes. 
C) changes in exchange rate par values. 
D) changes in the official settlements balance. 
A) changes in money supply and interest rates. 
B) changes in government expenditures and taxes. 
C) changes in exchange rate par values. 
D) changes in the official settlements balance.

Exam 22: How Does the Open Macroeconomy Work

The amount of price inflation that the economy experiences eventually depends on the size of the spending multiplier.

The LM curve has a:

The greater the degree of international capital mobility:

A vertical FE curve indicates perfect capital mobility.

The official settlements balance _____ if the IS-LM intersection is _____ the FE curve.

When taking into account foreign-income repercussions, the spending multiplier is:

The greater the marginal propensity to import:

Real domestic investment spending is:

The LM curve illustrates all combinations of domestic output levels and interest rates for which:

Suppose the United States' imports substantially affect foreign incomes, and the foreign countries import from the United States. The United States' spending multiplier will exceed the spending multiplier for a comparable small open economy.

The European Union has relatively large production and income effects on Africa.

Expansionary fiscal policy will cause the IS curve to shift to the right.

Equilibrium GDP in the short-run is determined at the point where:

The volume of imports is positively related to real national production and income. What are two reasons for this relationship?

The goal of internal balance includes:

If the marginal propensity to save is 0.3 and the marginal propensity to import is 0.2, then value of the simple spending multiplier is:

Which of the following is likely to have the most effect on a country's demand for imports?

In your opinion do government policies to stabilize real domestic production have a larger role to play in the IS-LM-FE model or in the monetary approach to the balance of payments? Why? (Note: This question is an extension of the analysis. It is not covered explicitly in the book.)

Fiscal policy consists of:

International Economics Is Different

The Basic Theory Using Demand and Supply

Why Everybody Trades: Comparative Advantage

Trade: Factor Availability and Factor Proportions Are Key

Who Gains and Who Loses From Trade

Scale Economies, Imperfect Competition, and Trade

Growth and Trade Part II: Trade Policy

Analysis of a Tariff

Nontariff Barriers to Imports

Arguments for and Against Protection

Pushing Exports

Trade Blocs and Trade Blocks

Trade and the Environment

Trade Policies for Developing Countries

Multinationals and Migration: International Factor Movements

Payments Among Nations

The Foreign Exchange Market

Forward Exchange and International Financial Investment

What Determines Exchange Rates

Government Policies Toward the Foreign Exchange Market

International Lending and Financial Crises

Internal and External Balance With Fixed Exchange Rates

Floating Exchange Rates and Internal Balance

National and Global Choices: Floating Rates and the Alternatives

Filters

The official settlements balance _ if the IS-LM intersection is _ the FE curve.