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 -Refer to Table 13.1.If weak economic conditions abroad result in Canada's exports falling from $3000 billion to $2500 billion,Canada's equilibrium income falls by approximately:

The value of the foreign trade multiplier equals the reciprocal of the sum of the marginal propensities to:

Under the gold standard,a surplus nation facing a gold inflow and an increase in its money supply would also experience a:

Under the classical gold standard,a trade surplus nation would realize gold inflows,an increase in its money supply,rising interest rates,and net investment inflows.

That the balance of payments could be adjusted by prices and interest rates,under a fixed exchange rate system,originated with Keynesian theory during the 1930s.

Figure 13.4.Canadian Economy Under a Fixed Exchange Rate System -Referring to Figure 13.4,Canada's marginal propensity to save equals 0.25 and marginal propensity to import equal 0.5.

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 improving profit expectations lead to an autonomous increase in Australian investment of $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.