Question 1

Given favorable elasticity conditions, other things equal a depreciation of the euro tends to result in

Accepted Answer

A)  lower prices of imported products for Italy. 
B)  higher prices of imported products for Italy. 
C)  a larger trade deficit for Italy. 
D)  a smaller trade surplus for Italy.

Question 2

The ____ effect suggests that following a currency depreciation, a country's trade balance worsens for a period before it improves.

Accepted Answer

A)  Marshall-Lerner 
B)  J-curve 
C)  absorption 
D)  pass-through

Question 3

To the extent that labor unions attain higher wages during periods of currency depreciation, the resulting wage inflation reduces the improving competitiveness of a country's business firms caused by depreciation.

Accepted Answer

A) True 
 B)False

Question 4

Suppose a country devalues its currency.If the country's demand for imports is inelastic, the price increase resulting from the devaluation results in a relatively small decrease in the volume of imports, causing total import expenditures to increase.

Accepted Answer

A) True 
 B)False

Question 5

According to the Marshall-Lerner condition, a currency devaluation will be successful in improving a country's trade balance if the

Accepted Answer

A)  sum of the elasticities of supply is more than 1. 
B)  sum of the elasticities of supply is less than 1. 
C)  sum of the elasticities of demand is more than 1. 
D)  sum of the elasticities of demand is less than 1.

Question 6

Suppose the U.S.economy is operating at full capacity and the dollar's exchange value depreciates.According to the absorption approach, the United States would have to accept reductions in domestic spending if the U.S.trade balance is to improve as a result of the depreciation.

Accepted Answer

A) True 
 B)False

Question 7

Assume the Canadian demand elasticity for imports equals 0.2, while the foreign demand elasticity for Canadian exports equals 0.3.Responding to a trade deficit, suppose the Canadian dollar depreciates by 20 percent.Other things equal, for Canada, the depreciation would lead to

Accepted Answer

A)  a worsening trade balance-a larger deficit. 
B)  an improving trade balance-a smaller deficit. 
C)  an unchanged trade balance. 
D)  None of these are correct.

Question 8

Assume that a country operates at full employment.According to the absorption approach, the only way that currency depreciation can improve the country's trade balance is for the country to reduce domestic spending, thus freeing resources needed to produce additional export goods and import substitutes.

Accepted Answer

A) True 
 B)False

Question 9

By decreasing the relative production costs of U.S.companies, a dollar appreciation tends to lower U.S.export prices in foreign-currency terms, which induces an increase in the amount of U.S.goods exported abroad.

Accepted Answer

A) True 
 B)False

Question 10

According to the ______, following a currency devaluation, the balance of trade worsens for a while before improving.

Accepted Answer

A)  A-curve effect 
B)  J-curve effect 
C)  L-curve effect 
D)  T-curve effect

Question 11

Assume that a country is operating at full employment.According to the absorption approach, the only way that currency depreciation can improve the balance of trade is for the country to implement

Accepted Answer

A)  expansionary fiscal policy to increase domestic spending. 
B)  expansionary monetary policy to increase domestic spending. 
C)  contractionary fiscal policy or monetary policy to cut domestic spending. 
D)  import tariffs and quotas that increase spending on domestically produced goods.

Question 12

Which approach considers the extent by which foreign and domestic prices adjust to a change in the exchange rate in the short run?

Accepted Answer

A)  the monetary approach 
B)  the absorption approach 
C)  the expenditure approach 
D)  the pass-through approach

Question 13

Assume that a country operates at less than full employment and has excess productive capacity.According to the absorption approach, a currency depreciation tends to

Accepted Answer

A)  expand domestic output and improve the balance of trade. 
B)  expand domestic output and worsen the balance of trade. 
C)  contract domestic output and improve the balance of trade. 
D)  contract domestic output and worsen the balance of trade.

Question 14

Concerning a currency depreciation, the elasticity approach and the absorption approach are theories that deal with the impact of the depreciation on

Accepted Answer

A)  exports and imports of goods and services. 
B)  the domestic supply and demand of money. 
C)  capital inflows and capital outflows. 
D)  rates of inflation and rates of deflation.

Question 15

Assume that a country experiences unemployment and excess production capacity.According to the absorption approach, a currency depreciation tends to decrease domestic output and worsen the balance of trade.

Accepted Answer

A) True 
 B)False

Question 16

Suppose the U.S.price elasticity of demand for imports equals 1.2 and the foreign elasticity of demand for U.S.exports equals 1.5.According to the Marshall-Lerner condition, an appreciation of the dollar's exchange value would worsen the U.S.balance of trade.

Accepted Answer

A) True 
 B)False

Question 17

Assume the Canadian demand elasticity for imports equals 1.2, while the foreign demand elasticity for Canadian exports equals 1.8.Responding to a trade deficit, suppose the Canadian dollar depreciates by 10 percent.Other things equal, for Canada, the depreciation would lead to

Accepted Answer

A)  a worsening trade balance-a larger deficit. 
B)  an improving trade balance-a smaller deficit. 
C)  an unchanged trade balance. 
D)  None of these are correct.

Question 18

The elasticity approach to currency depreciation emphasizes the income effects of depreciation.

Accepted Answer

A) True 
 B)False

Question 19

The desire of foreign producers to preserve market share for goods sold in the United States helps contribute to complete exchange-rate pass-through following a depreciation of the dollar.

Accepted Answer

A) True 
 B)False

Question 20

Because of the J-curve effect and partial currency pass-through, a depreciation of the domestic currency tends to increase the size of a

Accepted Answer

A)  trade surplus in the short run. 
B)  trade surplus in the long run. 
C)  trade deficit in the short run. 
D)  trade deficit in the long run.

Exam 13: Mechanisms of International Adjustment

Given favorable elasticity conditions, other things equal a depreciation of the euro tends to result in

The ____ effect suggests that following a currency depreciation, a country's trade balance worsens for a period before it improves.

To the extent that labor unions attain higher wages during periods of currency depreciation, the resulting wage inflation reduces the improving competitiveness of a country's business firms caused by depreciation.

Suppose a country devalues its currency.If the country's demand for imports is inelastic, the price increase resulting from the devaluation results in a relatively small decrease in the volume of imports, causing total import expenditures to increase.

According to the Marshall-Lerner condition, a currency devaluation will be successful in improving a country's trade balance if the

Suppose the U.S.economy is operating at full capacity and the dollar's exchange value depreciates.According to the absorption approach, the United States would have to accept reductions in domestic spending if the U.S.trade balance is to improve as a result of the depreciation.

Assume the Canadian demand elasticity for imports equals 0.2, while the foreign demand elasticity for Canadian exports equals 0.3.Responding to a trade deficit, suppose the Canadian dollar depreciates by 20 percent.Other things equal, for Canada, the depreciation would lead to

By decreasing the relative production costs of U.S.companies, a dollar appreciation tends to lower U.S.export prices in foreign-currency terms, which induces an increase in the amount of U.S.goods exported abroad.

According to the ______, following a currency devaluation, the balance of trade worsens for a while before improving.

Assume that a country is operating at full employment.According to the absorption approach, the only way that currency depreciation can improve the balance of trade is for the country to implement

Which approach considers the extent by which foreign and domestic prices adjust to a change in the exchange rate in the short run?

Assume that a country operates at less than full employment and has excess productive capacity.According to the absorption approach, a currency depreciation tends to

Concerning a currency depreciation, the elasticity approach and the absorption approach are theories that deal with the impact of the depreciation on

Assume that a country experiences unemployment and excess production capacity.According to the absorption approach, a currency depreciation tends to decrease domestic output and worsen the balance of trade.

Suppose the U.S.price elasticity of demand for imports equals 1.2 and the foreign elasticity of demand for U.S.exports equals 1.5.According to the Marshall-Lerner condition, an appreciation of the dollar's exchange value would worsen the U.S.balance of trade.

Assume the Canadian demand elasticity for imports equals 1.2, while the foreign demand elasticity for Canadian exports equals 1.8.Responding to a trade deficit, suppose the Canadian dollar depreciates by 10 percent.Other things equal, for Canada, the depreciation would lead to

The elasticity approach to currency depreciation emphasizes the income effects of depreciation.

The desire of foreign producers to preserve market share for goods sold in the United States helps contribute to complete exchange-rate pass-through following a depreciation of the dollar.

Because of the J-curve effect and partial currency pass-through, a depreciation of the domestic currency tends to increase the size of a