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 -Referring to Table 13.1,if Canada's income rises by $200 billion,saving would rise by:

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

The classical economists assumed

According to the monetary approach,balance-of-payments disequilibriums are the result of imbalances in a country's money supply and money demand.

The monetary approach contends that,under a fixed exchange rate system,policies that increase the supply of money relative to the demand for money lead to a trade surplus.

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

Refer to Exhibit 13.1.The value of the multiplier for the United States equals:

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.

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

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.

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

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.

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:

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.

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

Refer to Exhibit 13.1.The change in the level of U.S.imports resulting from the rise in U.S.income equals:

If the marginal propensity to save equals 0.2 and the marginal propensity to import equals 0.3,an autonomous decrease in investment spending of $1 million leads to a $2 million decrease in domestic income and a $600,000 decrease in imports.

Figure 13.3.U.S.Capital and Financial Account Under a Fixed Exchange Rate System -Refer to Figure 13.3.Falling investment profitability in the United States,relative to investment profitability abroad,would shift the U.S.capital and financial account schedule downward from CA₀ to CA₁,resulting in net financial outflows from the United States.

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:

According to the quantity theory of money,a change in the domestic money supply will bring about: