Exam 13: Mechanisms of International Adjustment

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

Under the gold standard, a nation with a current-account surplus would realize gold outflows, a decrease in its money supply, and a fall in its domestic 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:

Compared to classical economists, how did Keynesian economics change the discussion of trade adjustment?

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

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

The price-adjustment mechanism's relevance to the real world has been questioned on the grounds that national output is generally not at the full-employment level and that the velocity of money is not always constant.

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

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:

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

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 a:

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. imports resulting from the rise in U.S. income equals:

The classical gold standard

Assume identical interest rates on comparable securities in the United States and foreign countries. Suppose investors anticipate that in the future the U.S. dollar will depreciate against foreign currencies. Investment funds would tend to:

Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium? Variations in:

Under the price-adjustment mechanism, a government's efforts to maintain a current-account surplus is self defeating over the long run because a nation's current account automatically moves toward equilibrium.

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 increase in Australian imports of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

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 13.1. 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:

Explain David Hume's theory of automatic adjustment for balance of payments disequilibria.