Exam 13: Mechanisms of International Adjustment

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:

Under the classical gold standard, adjustments in domestic prices and short-term interest rates automatically promoted balance-of-payments equilibrium over the long run.

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 monetary approach to balance-of-payments adjustments suggests that all payments surpluses are the result of:

Under the gold standard, a deficit nation facing a gold outflow and a decrease in its money supply would also experience a:

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

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.

Figure 13.4. Canadian Economy Under a Fixed Exchange Rate System -Referring to Figure 13.4, Canada's foreign-trade multiplier equals 2.0.

Regarding the equation of exchange, the classical economists assumed that final output was below its maximum level while the velocity of money was volatile.

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

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.

Which approach to balance-of-payments adjustment suggests that balance-of-payments surpluses are the result of excess money demand in the home country?

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

According to the price-adjustment mechanism, trade deficits can occur only in the long run rather than in the short run.

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:

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

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

The gold standard's "rules of the game" required central bankers in a trade deficit nation to expand the money supply, leading to falling interest rates and net investment outflows.

During the gold standard era, central bankers agreed to react positively to international gold flows so as to reinforce the automatic adjustment mechanism. Which of the following best represents the above statement?

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 dwindling thriftiness leads to an autonomous decrease in Australian saving to $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.