Exam 13: Mechanisms of International Adjustment

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:

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.

Is the monetary approach to the balance-of-payments part of the traditional adjustment theories?

According to the "rules of the game" of the gold standard era, a country's central bank agreed to react to international gold flows so as to:

Keynesian theory asserts that, under a system of fixed exchange rates, the influence of income changes in surplus and deficit countries will automatically promote current-account equilibrium.

For the income adjustment mechanism to reverse a trade deficit, economic policymakers must be willing to permit domestic income to increase which leads to rising imports.

According to the Keynesian income-adjustment mechanism, income differentials among nations guarantee current-account equilibrium in a world of fixed exchange rates.

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 increase to levels higher than those abroad. For Canada, this tends to promote:

The gold standard's "rules of the game" required central bankers in a surplus country to initiate contractionary monetary policies which lead to higher interest rates and net investment inflows.

An "automatic" adjustment mechanism would require a trade-surplus nation to accept price deflation and/or falling income as the cost of increasing imports.

If the marginal propensity to save equals 0.1 and the marginal propensity to import equals 0.3, an autonomous increase in exports of $1,000 would expand domestic income by $2,500 which leads to an increase in imports of $750.

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

Suppose the United States levies an interest equalization tax, which taxes Americans on dividend and interest income from foreign securities. Such a tax would be intended to:

The classical economists assumed

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

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, 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 improving economic conditions abroad lead to an autonomous increase in Australian exports of $5 billion. Australian income thus ____ which leads to Australia's trade account moving to a ____.

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

The foreign-trade multiplier equals the sum of the marginal propensity to import and the marginal propensity to save.