Ch13 International econ 13th edition

8/12/2019 Ch13 International econ 13th edition

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CHAPTER 13BALANCE-OF-PAYMENTS ADJUSTMENTS

MULTIPLE CHOICE

1. Which of the following does not represent an automatic adjustment in balance-of-paymentsdisequilibrium? Variations in:a.

Domestic income

b.

oreign prices

c.

Domestic prices

d.

oreign par !alues

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'. &he balance-of-payments adjustment mechanism de!eloped during the 1())s by the *nglisheconomist Da!id +ume is the:a.

,ncome-adjustment mechanism

b.

le ible-e change-rate-adjustment mechanism

c.

%rice-adjustment mechanism

d.

an/-reser!e-adjustment mechanism

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. Which chain of e!ents would promote payments equilibrium for a surplus nation2 according to the price-adjustment mechanism?a.

,ncreasing money supply--increasing domestic prices--rising imports--falling e ports

b.

,ncreasing money supply--falling domestic prices--rising imports--falling e ports

c.

Decreasing money supply--increasing domestic prices--falling imports--rising e ports

d.

Decreasing money supply--decreasing domestic prices--falling imports--rising e ports

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3. Which chain of e!ents would promote payments equilibrium for a deficit nation2 according to the price-adjustment mechanism?a.

,ncreasing money supply--increasing domestic prices--rising imports--falling e ports

b.

,ncreasing money supply--falling domestic prices--rising imports--falling e ports


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c.

Decreasing money supply--increasing domestic prices--falling imports--rising e ports

d.

Decreasing money supply--decreasing domestic prices--falling imports--rising e ports

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4. During the gold standard era2 central ban/ers agreed to react positi!ely to international gold flows soas to reinforce the automatic adjustment mechanism. Which of the following best represents the abo!estatement?a.


b.


c.

ules of the game

d.

Discretionary fiscal policy

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5. During the gold standard era2 the 6rules of the game6 suggested that:a.

$urplus countries should increase their money supplies

b.

Deficit countries should increase their money supplies

c.

$urplus and deficit countries should increase their money supplies

d.

$urplus and deficit countries should decrease their money supplies

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(. Which of the following balance-of-payments adjustment mechanisms is most closely related to thequantity theory of money?a.


b.


c.

,nterest-rate-adjustment mechanism

d.

7utput-adjustment mechanism

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9. nder the gold standard2 a surplus nation facing a gold inflow and an increase in its money supplywould also e perience a:


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a.

ise in its interest rate and a short-term financial inflow

b.

ise in its interest rate and a short-term financial outflow

c.

all in its interest rate and a short-term financial inflow

d.

all in its interest rate and a short-term financial outflow

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;. nder the gold standard2 a deficit nation facing a gold outflow and a decrease in its money supplywould also e perience a:a.

ise in its interest rate and a short-term financial inflow

b.

ise in its interest rate and a short-term financial outflow

c.

all in its interest rate and a short-term financial inflow

d.

all in its interest rate and a short-term financial outflow

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1). "ssume that 0anada initially faces payments equilibrium in its merchandise trade account as well as inits capital and financial account. #ow suppose that 0anadian interest rates increase to le!els higherthan those abroad. or 0anada2 this tends to promote:a.

#et financial inflows

b

.

#et financial outflows

c.

#et merchandise e ports

d.

#et merchandise imports

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11. "ssume that 0anada initially faces payments equilibrium in its merchandise trade account as well as inits capital and financial account. #ow suppose that 0anadian interest rates fall to le!els below thoseabroad. or 0anada2 this tends to promote:

a.

#et financial inflows

b.

#et financial outflows

c.

#et merchandise e ports

d.

#et merchandise imports


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1'. $uppose the nited $tates le!ies an interest equalis e ports and incomele!el. With a higher income le!el2 $weden imports more goods from =apan. &hus a change in importsin =apan results in a feedbac/ effect on its e ports. &his process is best referred to as the:a.

onetary approach to balance-of-payments adjustment

b.

Discretionary income adjustment process

c.

oreign repercussion effect

d.

%rice-specie flow mechanism

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Exhibit 13.1

"ssume the marginal propensity to consume for .$. households equals ).;2 and the marginal propensity to import for the nited $tates equals ).1. $uppose there occurs an increase in in!estmentof @1) billion at each le!el of income.


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14. efer to * hibit 1 .1. &he !alue of the multiplier for the nited $tates equals:a.

'

b.c.

3

d.

4

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15. efer to * hibit 1 .1. &he change in the le!el of .$. income resulting from the additional in!estmentspending equalsa.

@') billion

b.

@ ) billion

c. @3) billiond.

@4) billion

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1(. efer to * hibit 1 .1. &he change in the le!el of .$. imports resulting from the rise in .$. incomeequals:a.

@4 billion

b. @1) billion

c.

@14 billion

d.

@') billion

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19. &he monetary approach to balance-of-payments adjustments suggests that all payments deficits are theresult of:

a.

&oo high interest rates in the home country

b.

&oo low interest rates in the home country

c.

* cess money supply o!er money demand in the home country

d.

* cess money demand o!er money supply in the home country


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1;. &he monetary approach to balance-of-payments adjustments suggests that all payments surpluses arethe result of:a.

&oo high interest rates in the home country

b.

&oo low interest rates in the home country

c.

* cess money supply o!er money demand in the home country

d.

* cess money demand o!er money supply in the home country

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'). $tarting from a position where the nation>s money demand equals the money supply2 and its balance of payments is in equilibrium2 economic theory suggests that the nation>s balance of payments wouldmo!e into a deficit position if there occurred in the nation a:

a. Decrease in the money supply

b.

,ncrease in the money demand

c.

Decrease in the money demand

d.

#one of the abo!e

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'1. Which approach to balance-of-payments adjustment suggests that balance-of-payments surpluses arethe result of e cess money demand in the home country?a.

"bsorption approach

b.

*lasticities approach

c.

onetary approach

d.

%urchasing-power-parity approach

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''. "ccording to the 6rules of the game6 of the gold standard era2 a country>s central ban/ agreed to reactto international gold flows so as to:a.

7fficially de!alue a currency during eras of payments surpluses

b.

7fficially re!alue a currency during eras of payments deficits

c 7ffset the automatic-adjustment mechanism Ae.g.2 pricesB


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.d.

einforce the automatic-adjustment mechanism

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' . "ccording to the quantity theory of money2 a change in the domestic money supply will bring about:

a. ,n!erse and proportionate changes in the price le!el b.

,n!erse and less-than-proportionate changes in the price le!el

c.

Direct and proportionate changes in the price le!el

d.

Direct and less-than-proportionate changes in the price le!el

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'3. &he formulation of the so-called income adjustment mechanism is associated with:a.

"dam $mith

b.

Da!id icardo

c.

Da!id +ume

d.

=ohn aynard Ceynes

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'4. &he !alue of the foreign trade multiplier equals the reciprocal of the sum of the marginal propensitiesto:a.

$a!e plus import

b.

,mport plus in!est

c.

0onsume plus e port

d.

$a!e plus import

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'5. $tarting from a position where the nation>s money demand equals the money supply and its balance of payments is in equilibrium2 economic theory suggests that the nation>s balance of payments wouldmo!e into a deficit position if there occurred in the nation:a.

"n increase in the money supply


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b.

" decrease in the money supply

c.

"n increase in money demand

d.

#one of the abo!e

"#$: " %&$: 1

'(. $tarting from a position where the nation>s money demand equals the money supply and its balance of payments is in equilibrium2 economic theory suggests that the nation>s balance of payments wouldmo!e into a surplus position if there occurred in the nation:a.

" decrease in the money supply

b.

"n increase in the money supply

c.

" decrease in the money demand

d.

#one of the abo!e

"#$: " %&$: 1

'9. $tarting from a position where the nation>s money demand equals the money supply and its balance of payments is in equilibrium2 economic theory suggests that the nation>s balance of payments wouldmo!e into a surplus position if there occurred in the nation:a.

"n increase in the money demand

b.

" decrease in the money demand

c. "n increase in the money supply

d.

#one of the abo!e

"#$: " %&$: 1

';. "ssume identical interest rates on comparable securities in the nited $tates and foreign countries.$uppose in!estors anticipate that in the future the .$. dollar will depreciate against foreigncurrencies. ,n!estment funds would tend to:a

.

low from the nited $tates to foreign countries

b.

low from foreign countries to the nited $tates

c.

emain totally in foreign countries

d.

emain totally in the nited $tates


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). $uppose that rising .$. income leads to higher sales and profits in the nited $tates. &his wouldli/ely result in:a.

,ncreasing portfolio in!estment into the nited $tates

b.

Decreasing portfolio in!estment into the nited $tates

c.

,ncreasing direct in!estment into the nited $tates

d.

Decreasing direct in!estment into the nited $tates

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Fig !" 13.1. U.S. C#$it#% #&' Fi&(i#% A(() &t

1. efer to igure 1 .1. pward mo!ements along .$. capital and financial account schedule 0" ) would be caused by:a.

.$. interest rates rising relati!e to foreign interest rates

b.

.$. interest rates falling relati!e to foreign interest rates

c.

&a es placed on income earned by .$. residents from their foreign in!estments

d.

&a es placed on income earned by foreign residents from their .$. in!estments

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'. efer to igure 1 .1. Downward mo!ements along .$. capital and financial account schedule 0" ) would be caused by:


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a.

.$. interest rates rising relati!e to foreign interest rates

b.

.$. interest rates falling relati!e to foreign interest rates

c.

&a es placed on income earned by .$. residents from their foreign in!estments

d.

&a es placed on income earned by foreign residents from their .$. in!estments

"#$: 8 %&$: 1

. efer to igure 1 .1. &he .$. capital and financial account schedule would shift upward from 0" ) to0" 1 if:a.

.$. interest rates e ceeded foreign interest rates

b.

oreign interest rates e ceeded .$. interest rates

c.

&a es were placed on income earned by .$. residents from their foreign in!estments

d.

&a es were placed on income earned by foreign residents from their .$. in!estments

"#$: 0 %&$: 1

3. efer to igure 1 .1. &he .$. capital and financial account schedule would shift upward from 0" ) to0" 1 if:a.

.$. residents recei!e subsidies to in!est in foreign nations

b.

.$. interest rates rise relati!e to foreign interest rates

c. &a es are reduced on income earned by .$. residents from their foreign in!estments

d.

* pected profits decline on .$. in!estments in foreign manufacturing

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4. efer to igure 1 .1. &he .$. capital and financial account schedule would shift upward from 0" ) to0" 1 for all of the following reasons e cept:a.

.$. political stability impro!es relati!e to foreign political stability

b.

.$. interest rates fall relati!e to foreign interest rates

c.

&a es are placed on income earned by .$. residents from foreign in!estments

d.

estrictions are imposed on foreign loans granted by .$. ban/s

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5. efer to igure 1 .1. .$. capital and financial account schedule 0" ) would shift upwards2 ordownwards2 for all of the following reasons e cept:a.

.$. residents being ta ed on income earned from foreign in!estments

b.

.$. ban/s being restricted on loans that can be made abroad

c.

.$. political stability changing relati!e to foreign political stability

d.

.$. interest rates changing relati!e to foreign interest rates

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T#b%" 13.1. C#'#*+ S#,i&g I&,"+t "&t I $)!t #&' Ex$)!t F &(ti)&+ /i& bi%%i)&+ )0 ')%%#!+U&'"! # S2+t" )0 Fix"' Ex(h#&g" R#t"+

* port unction E ))),n!estment unction , E 1)))

$a!ing unction $ E -1))) F ).'G,mport unction E 4)) F ).'4G

(. eferring to &able 1 .12 if 0anada>s income rises by @')) billion2 sa!ing would rise by:a.

@1) billion

b.

@') billion

c.

@ ) billion

d

.

@3) billion

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9. eferring to &able 1 .12 if 0anada>s income rises by @')) billion2 imports would rise by:a.

@4) billion

b.

@(4 billion

c.

@1)) billion

d.

@1'4 billion

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;. eferring to &able 1 .12 0anada>s foreign trade multiplier equals:a 1.(4


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. b.

'.)4

c.

'.''

d.

'.53

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3). eferring to &able 1 .12 0anada>s equilibrium le!el of income is:a.

@9))) billion

b.

@;))) billion

c.

@1)2))) billion

d.

@112))) billion

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31. efer to &able 1 .1. ,f impro!ed business optimism leads to increases in 0anada>s planned in!estmentspending from @1))) billion to @1')) billion2 0anada>s equilibrium income rises by appro imately:a.

@333 billion

b.

@444 billion

c.

@555 billion

d. @((( billion

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3'. efer to &able 1 .1. ,f wea/ economic conditions abroad result in 0anada>s e ports falling from @ ))) billion to @'4)) billion2 0anada>s equilibrium income falls by appro imately:a.

@999 billion

b.

@;;) billion

c.

@111) billion

d.

@1'') billion

"#$: 0 %&$: 1


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Fig !" 13. . A +t!#%i#& E()&) 2 U&'"! # Fix"' Ex(h#&g" R#t" S2+t"

3 . efer to igure 1 .'. &he slope of the A - B schedule and A$-,B schedule indicates that "ustralia>sforeign trade multiplier is:a.

).4

b.

1.)

c.

1.4

d.

'.)

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33. efer to igure 1 .'. $tarting at equilibrium income @4) billion2 where A$-,B ) intersects A - B ) 2suppose that impro!ing economic conditions abroad lead to an autonomous increase in "ustraliane ports of @4 billion. "ustralian income thus HHHH which leads to "ustralia>s trade account mo!ing to a

HHHH.a.

ises to @5) billion2 surplus of @'.4 billion

b.

ises to @5) billion2 surplus of @4 billion

c

.

alls to @3) billion2 deficit of @'.4 billion

d.

alls to @3) billion2 deficit of @4 billion

"#$: " %&$: 1


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34. efer to igure 1 .'. $tarting at equilibrium income @4) billion2 where A$- ,B ) intersects A - B ) 2suppose that worsening economic conditions abroad lead to an autonomous decrease in "ustraliane ports of @4 billion. "ustralian income thus HHHH which leads to "ustralia>s trade account mo!ing to a

HHHH.a.


b.


c.


d.


"#$: 0 %&$: 1

35. efer to igure 1 .'. $tarting at equilibrium income @4) billion2 where A$-,B ) intersects A - B ) 2suppose that impro!ing profit e pectations lead to an autonomous increase in "ustralian in!estment of@4 billion. "ustralian income thus HHHH which leads to "ustralia>s trade account mo!ing to a HHHH.a.

ises to @5) billion2 deficit of @'.4 billion

b.

ises to @5) billion2 deficit of @4 billion

c.

alls to @3) billion2 surplus of @'.4 billion

d.

alls to @3) billion2 surplus of @4 billion

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3(. efer to igure 1 .'. $tarting at equilibrium income @4) billion2 where A$-,B ) intersects A - B ) 2

suppose that worsening profit e pectations lead to an autonomous decrease in "ustralian in!estment of@4 billion. "ustralian income thus HHHH which leads to "ustralia>s trade account mo!ing to a HHHH.a.


b.


c.


d.


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39. efer to igure 1 .'. $tarting at equilibrium income @4) billion2 where A$-,B ) intersects A - B ) 2suppose that increased thriftiness leads to an autonomous increase in "ustralian sa!ing of @4 billion."ustralian income thus HHHH which leads to "ustralia>s trade account mo!ing to a HHHH.a.


b.



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c.


d.


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3;. efer to igure 1 .'. $tarting at equilibrium income @4) billion2 where A$-,B ) intersects A - B ) 2suppose that dwindling thriftiness leads to an autonomous decrease in "ustralian sa!ing to @4 billion."ustralian income thus HHHH which leads to "ustralia>s trade account mo!ing to a HHHH.a.


b.


c.


d.


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4). efer to igure 1 .'. $tarting at equilibrium income @4) billion2 where A$-,B ) intersects A - B ) 2suppose that changing preferences lead to an autonomous increase in "ustralian imports of @4 billion."ustralian income thus HHHH which leads to "ustralia>s trade account mo!ing to a HHHH.a.


b.


c.


d. alls to @3) billion2 deficit of @4 billion

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41. efer to igure 1 .'. $tarting at equilibrium income @4) billion2 where A$-,B ) intersects A - B ) 2suppose that changing preferences lead to an autonomous decrease in "ustralian imports of @4 billion."ustralian income thus HHHH which leads to "ustralia>s trade account mo!ing to a HHHH.a.


b

.


c.


d.


"#$: " %&$: 1


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4'. ,n e plaining balance-of-payments adjustments2 the classical economistsa.

ocused on interest rates e clusi!ely

b.

emained aware of the role of interest rates

c.

7nly focused their attention on short-term interest rates

d.

%aid e clusi!e attention to long-tem interest rates

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4 . =. . Ceynes suggested that a trade deficit nationa.

Would e perience a fall in income

b.

Would e perience a decline in imports

c

.

Would require acti!e inter!ention by the go!ernment

d.

8oth a and b

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43. &he classical gold standarda.

* isted from early 19))>s to early 1;))>s

b.

Did not allow for imports and e ports of gold

c. Ied to the outflow of gold from surplus nations

d.

Ied to the inflow of gold to deficit nations

"#$: " %&$: 1

44. &he classical economists assumeda.

&hat the !olume of final output is fi ed at the full-employment le!el in the long-run

b

.

&he !elocity of money is constant

c.

&he !elocity of money depends on physical2 structural2 and institutional factors

d.

"ll of the abo!e

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TRUE4FALSE

1. nder a fi ed e change rate system2 adjustment mechanisms wor/ for the automatic return to current-account balance after the initial balance has been disrupted.

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'. When a country>s current account mo!es into disequilibrium2 automatic adjustments in tariffs andquotas occur which mo!e the current account bac/ into equilibrium.

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. %rices2 interest rates2 and income are the automatic adjustment !ariables that help restore current-account equilibrium under a system of fi ed e change rates.

"#$: & %&$: 1

3. &hat the balance of payments could be adjusted by prices and interest rates2 under a fi ed e changerate system2 originated with Ceynesian theory during the 1; )s.

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4. Da!id +ume>s price-adjustment mechanism supported the mercantilist !iew that a nation couldmaintain a trade surplus indefinitely.

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5. nder the price-adjustment mechanism2 a go!ernment>s efforts to maintain a current-account surplus isself defeating o!er the long run because a nation>s current account automatically mo!es towardequilibrium.

"#$: & %&$: 1

(. nder the gold standard of the 19))s2 e change rates were allowed to float freely in the currencymar/ets.

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9. nder the gold standard2 each participating nation defined the mint price of gold in terms of itsnational currency was prepared to buy and sell gold at that price.

"#$: & %&$: 1

;. nder the gold standard2 a nation with a current-account surplus would reali


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11. "ccording to the equation of e change2 the total e penditures on final goods equals the monetary!alue of the final goods sold.

"#$: & %&$: 1

1'. egarding the equation of e change2 the classical economists assumed that final output was below itsma imum le!el while the !elocity of money was !olatile.

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1 . "ccording to the quantity theory of money2 a change in the money supply will induce an in!erse andless-than-proportionate change in the price le!el.

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13. nder the price-adjustment mechanism2 a trade-surplus nation would reali


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'1. &he gold standard>s 6rules of the game6 required central ban/ers in a trade deficit nation to e pand themoney supply2 leading to falling interest rates and net in!estment outflows.

"#$: %&$: 1

''. &he 6rules of the game6 ser!ed to reinforce and speed up the interest-rate-adjustment mechanism undera system of fi ed e change rates.

"#$: & %&$: 1

Fig !" 13.3. U.S. C#$it#% #&' Fi&(i#% A(() &t U&'"! # Fix"' Ex(h#&g" R#t" S2+t"

' . efer to igure 1 . . "s .$. interest rates rise relati!e to foreign interest rates2 the .$. slides upwardalong schedule 0" ) 2 thus mo!ing towards capital and financial account surplus.

"#$: & %&$: 1

'3. efer to igure 1 . . Decreases in .$. interest rates relati!e to foreign interest rates would shift .$.capital and financial account schedule 0" ) downward toward 0" 12 resulting in net financial outflowsfrom the nited $tates.

"#$: %&$: 1

'4. efer to igure 1 . . alling in!estment profitability in the nited $tates2 relati!e to in!estment

profitability abroad2 would shift the .$. capital and financial account schedule downward from 0" ) to 0" 12 resulting in net financial outflows from the nited $tates.

"#$: & %&$: 1

'5. efer to igure 1 . . "s the .$. go!ernment decreases ta es on income earned by .$. residents fromforeign in!estments2 the .$. capital and financial account schedule shifts downward from 0" ) to 0" 1and the nited $tates reali


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"#$: & %&$: 1

'(. efer to igure 1 . . ,f the political and economic stability of foreign countries worsens relati!e to thatof the nited $tates2 the .$. capital and financial account schedule would shift downward from 0" ) to 0" 12 resulting in net financial outflows from the nited $tates.

"#$: %&$: 1

'9. "ccording to the Ceynesian income-adjustment mechanism2 income differentials among nationsguarantee current-account equilibrium in a world of fi ed e change rates.

"#$: %&$: 1

';. Ceynesian theory asserts that2 under a system of fi ed e change rates2 the influence of income changesin surplus and deficit countries will automatically promote current-account equilibrium.

"#$: & %&$: 1

). &he Ceynesian income-adjustment mechanism contends that a trade-surplus nation tends to reali


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"#$: %&$: 1

(. eliance on an automatic adjustment process tends to be unacceptable in trade-deficit nations since itrequires them to accept price deflation andJor falling income as a cost of reducing imports.

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9. "n 6automatic6 adjustment mechanism would require a trade-surplus nation to accept price deflationandJor falling income as the cost of increasing imports.

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Fig !" 13.5. C#'i#& E()&) 2 U&'"! # Fix"' Ex(h#&g" R#t" S2+t"

;. eferring to igure 1 .32 0anada>s marginal propensity to sa!e equals ).'4 and marginal propensity toimport equal ).4.

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3). eferring to igure 1 .32 0anada>s foreign-trade multiplier equals '.).

"#$: & %&$: 1

31. efer to igure 1 .3. $tarting at equilibrium income @1)) billion2 where A$ - ,B ) intersects A - B ) 2 anautonomous decrease in 0anadian imports of @1) billion leads to a @') billion decrease in income anda trade deficit of @4 billion.

"#$: %&$: 1


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,t refers to a situation in which a change in one nation>s macroeconomic !ariables relati!e to anothernation will induce a chain reaction in both nations> economies. &he consequence is that a rise inincome of a nation with a balance-of-payments surplus and the fall in income of the nation with a

balance-of-payments deficit are dampened.

%&$: 1

ESSAY

1. * plain Da!id +ume>s theory of automatic adjustment for balance of payments disequilibria.

"#$:Da!id +ume>s theory pro!ided an e planation of the automatic adjustment process that occurred underthe gold standard. $tarting from a condition of payments balance2 any surplus or deficit wouldautomatically be eliminated by changes in domestic price le!els. #ations with a payments surpluswould e perience inflationK this would lead to a loss of competiti!eness2 a decrease in net e ports2 anda fall in the surplus. &he opposite applies to nations with a payments deficit.

%&$: 1

'. ,s the monetary approach to the balance-of-payments part of the traditional adjustment theories?

"#$:&he monetary approach to the balance of payments is presented as an alternati!e2 rather than asupplement to traditional adjustment theories. ,t maintains that2 o!er the long run2 paymentsdisequilibria are rooted in the relationship between the demand for and the supply of money."djustment in the balance of payments is !iewed as an automatic process.

%&$: 1

Documents

Ch13 International econ 13th edition