Exam 13: Mechanisms of International Adjustment

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.

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

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

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System -Refer to Figure 13.3. As the U.S. government decreases taxes on income earned by U.S. residents from foreign investments, the U.S. capital and financial account schedule shifts downward from CA₀ to CA₁ and the United States realizes net financial outflows.

Under the price-adjustment mechanism, a trade-surplus nation would realize gold inflows, an increase in its money supply, and a loss of international competitiveness.

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

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

Under the gold standard, each participating nation defined the mint price of gold in terms of its national currency was prepared to buy and sell gold at that price.

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

According to the equation of exchange, the total expenditures on final goods equals the monetary value of the final goods sold.

What is the foreign repercussion effect?

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

J. M. Keynes suggested that a trade deficit 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:

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

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.

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System -Refer to Figure 13.3. If the political and economic stability of foreign countries worsens relative to that of the United States, the U.S. capital and financial account schedule would shift downward from CA₀ to CA₁, resulting in net financial outflows from the United States.

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.

Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account. Now suppose that Canadian interest rates fall to levels below those abroad. For Canada, this tends to promote:

During the gold standard era, the "rules of the game" suggested that: