Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

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

Accepted Answer

David Hume's theory provided an explanation of the automatic adjustment process that occurred under the gold standard.Starting from a condition of payments balance,any surplus or deficit would automatically be eliminated by changes in domestic price levels.Nations with a payments surplus would experience inflation; this would lead to a loss of competitiveness,a decrease in net exports,and a fall in the surplus.The opposite applies to nations with a payments deficit.

Question 3

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.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium? Variations in:

Accepted Answer

A)   Domestic income
B)   Foreign prices
C)   Domestic prices
D)   Foreign par values

Question 5

During the gold standard era,the "rules of the game" suggested that:

Accepted Answer

A)   Surplus countries should increase their money supplies
B)   Deficit countries should increase their money supplies
C)   Surplus and deficit countries should increase their money supplies
D)   Surplus and deficit countries should decrease their money supplies

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

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 ____.

Accepted Answer

A)   Rises to $60 billion,deficit of $2.5 billion
B)   Rises to $60 billion,deficit of $5 billion
C)   Falls to $40 billion,surplus of $2.5 billion
D)   Falls to $40 billion,surplus of $5 billion

Question 8

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

Accepted Answer

A)   Absorption approach
B)   Elasticities approach
C)   Monetary approach
D)   Purchasing-power-parity approach

Question 9

Compared to classical economists,how did Keynesian economics change the discussion of trade adjustment?

Accepted Answer

The answer of Compared to classical economists,how did Keynesian economics...

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Under the gold standard,each participating nation defined the mint price of gold in terms of its national currency was prepared to buy and sell gold at that price.

Accepted Answer

A) True 
 B)False

Question 12

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 fall to levels below those abroad.For Canada,this tends to promote:

Accepted Answer

A)   Net financial inflows
B)   Net financial outflows
C)   Net merchandise exports
D)   Net merchandise imports

Question 13

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

Accepted Answer

The answer of Is the monetary approach to the balance-of-payments...

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A)   Too high interest rates in the home country
B)   Too low interest rates in the home country
C)   Excess money supply over money demand in the home country
D)   Excess money demand over money supply in the home country

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A)   Rises to $60 billion,deficit of $2.5 billion
B)   Rises to $60 billion,deficit of $5 billion
C)   Falls to $40 billion,surplus of $2.5 billion
D)   Falls to $40 billion,surplus of $5 billion

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A)   Rise in its interest rate and a short-term financial inflow
B)   Rise in its interest rate and a short-term financial outflow
C)   Fall in its interest rate and a short-term financial inflow
D)   Fall in its interest rate and a short-term financial outflow

Exam 13: Mechanisms of International Adjustment

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

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

Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium? Variations in:

During the gold standard era,the "rules of the game" suggested that:

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.

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

Compared to classical economists,how did Keynesian economics change the discussion of trade adjustment?

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

Under the gold standard,each participating nation defined the mint price of gold in terms of its national currency was prepared to buy and sell gold at that price.

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 fall to levels below those abroad.For Canada,this tends to promote:

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

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

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

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.

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.

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