Exam 13: Mechanisms of International Adjustment

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

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.

The monetary approach contends that,under a fixed exchange rate system,an excess demand for money leads to a trade deficit.

Under the gold standard,a surplus nation facing a gold inflow and an increase in its money supply would also experience a:

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

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 13.1.U.S.Capital and Financial Account -Refer to Figure 13.1.U.S.capital and financial account schedule CA₀ would shift upwards,or downwards,for all of the following reasons except:

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

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 ____.

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:

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.

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.

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

Under a fixed exchange rate system,adjustment mechanisms work for the automatic return to current-account balance after the initial balance has been disrupted.

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:

For an open economy subject to international trade,equilibrium income occurs where saving plus investment equals imports plus exports.

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.

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?

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