Exam 13: Mechanisms of International Adjustment

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,if Canada's income rises by $200 billion,saving would rise by:

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 changing preferences lead to an autonomous decrease in Australian imports of $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.

Prices,interest rates,and income are the automatic adjustment variables that help restore current-account equilibrium under a system of fixed exchange rates.

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 deficit position if there occurred in the nation:

Assume that interest rates on comparable securities are identical in the United States and foreign countries.Now suppose that investors anticipate that in the future the U.S.dollar will appreciate against foreign currencies.Investment funds would thus be expected to:

Figure 13.3.U.S.Capital and Financial Account Under a Fixed Exchange Rate System -Refer to Figure 13.3.As U.S.interest rates rise relative to foreign interest rates,the U.S.slides upward along schedule CA0,thus moving towards capital and financial account surplus.

The monetary approach contends that,under a fixed exchange rate system,an excess supply of money leads to a trade surplus.

The essence of the classical price-adjustment mechanism is embodied in the quantity theory of money.

Which of the following balance-of-payments adjustment mechanisms is most closely related to the quantity theory of money?

The monetary approach contends that,under a fixed exchange rate system,policies that increase the supply of money relative to the demand for money lead to a trade surplus.

Figure 13.4.Canadian Economy Under a Fixed Exchange Rate System -Refer to Figure 13.4.Starting at equilibrium income $100 billion,where (S - I)0 intersects (X - M)0,an autonomous decrease in Canadian imports of $10 billion leads to a $20 billion decrease in income and a trade deficit of $5 billion.

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 value of the multiplier for the United States equals:

The balance-of-payments adjustment mechanism developed during the 1700s by the English economist David Hume is the:

According to the quantity theory of money,a change in the money supply will induce an inverse and less-than-proportionate change in the price level.

Figure 13.1.U.S.Capital and Financial Account -Refer to Figure 13.1.The U.S.capital and financial account schedule would shift upward from CA0 to CA1 if:

Under the gold standard of the 1800s,exchange rates were allowed to float freely in the currency markets.

When a country's current account moves into disequilibrium,automatic adjustments in tariffs and quotas occur which move the current account back into equilibrium.

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,if Canada's income rises by $200 billion,imports would rise by:

Suppose that rising U.S.income leads to higher sales and profits in the United States.This would likely result in:

Which chain of events would promote payments equilibrium for a surplus nation,according to the price-adjustment mechanism?