Exam 13: Mechanisms of International Adjustment

Starting from a position where the nation's money demand equals the money supply and its balance of payments is in equilibrium,economic theory suggests that the nation's balance of payments would move into a surplus position if there occurred in the nation:

Figure 13.3.U.S.Capital and Financial Account Under a Fixed Exchange Rate System -Refer to Figure 13.3.Decreases in U.S.interest rates relative to foreign interest rates would shift U.S.capital and financial account schedule CA0 downward toward CA1,resulting in net financial outflows from the United States.

Figure 13.1.U.S.Capital and Financial Account -Refer to Figure 13.1.Downward movements along U.S.capital and financial account schedule CA0 would be caused by:

The gold standard's "rules of the game" required central bankers in a surplus country to initiate contractionary monetary policies which lead to higher interest rates and net investment inflows.

The formulation of the so-called income adjustment mechanism is associated with:

Figure 13.2.Australian Economy Under a Fixed Exchange Rate System -Refer to Figure 13.2.Starting at equilibrium income $50 billion,where (S- I)0 intersects (X-M)0,suppose that worsening economic conditions abroad lead to an autonomous decrease in Australian exports of $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.

If the marginal propensity to save equals 0.2 and the marginal propensity to import equals 0.3,an autonomous decrease in investment spending of $1 million leads to a $2 million decrease in domestic income and a $600,000 decrease in imports.

David Hume's price-adjustment mechanism supported the mercantilist view that a nation could maintain a trade surplus indefinitely.

Table 13.1.Canada's Saving,Investment,Import,and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates Export Function X = 3000 Investment Function I = 1000 Saving Function S = -1000 + 0.2Y Import Function M = 500 + 0.25Y -Referring to Table 13.1,Canada's foreign trade multiplier equals:

The Keynesian income-adjustment mechanism contends that a trade-surplus nation tends to realize falling income and falling imports,thus accentuating the trade surplus.

According to the "rules of the game" of the gold standard era,a country's central bank agreed to react to international gold flows so as to:

The "rules of the game" served to reinforce and speed up the interest-rate-adjustment mechanism under a system of fixed exchange rates.

According to the quantity theory of money,a change in the domestic money supply will bring about:

Figure 13.1.U.S.Capital and Financial Account -Refer to Figure 13.1.U.S.capital and financial account schedule CA0 would shift upwards,or downwards,for all of the following reasons except:

Table 13.1.Canada's Saving,Investment,Import,and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates Export Function X = 3000 Investment Function I = 1000 Saving Function S = -1000 + 0.2Y Import Function M = 500 + 0.25Y -Referring to Table 13.1,Canada's equilibrium level of income is:

Suppose Japan increases its imports from Sweden,leading to a rise in Sweden's exports and income level.With a higher income level,Sweden imports more goods from Japan.Thus a change in imports in Japan results in a feedback effect on its exports.This process is best referred to as the:

The classical economists assumed

Exhibit 13.1 Assume the marginal propensity to consume for U.S.households equals 0.9,and the marginal propensity to import for the United States equals 0.1.Suppose there occurs an increase in investment of $10 billion at each level of income. -Refer to Exhibit 13.1.The change in the level of U.S.income resulting from the additional investment spending equals

Table 13.1.Canada's Saving,Investment,Import,and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates Export Function X = 3000 Investment Function I = 1000 Saving Function S = -1000 + 0.2Y Import Function M = 500 + 0.25Y -Refer to Table 13.1.If improved business optimism leads to increases in Canada's planned investment spending from $1000 billion to $1200 billion,Canada's equilibrium income rises by approximately:

If the marginal propensity to save equals 0.2 and the marginal propensity to import equals 0.3,the foreign-trade multiplier equal 2.0.