Dr. Nasser Duella Fall 2013International Economics HW # 7

1. As a result of a depreciation of the dollar relative to the Euro, the equilibrium Euro price of US imports willa) Increase and the quantity of imports will increase.b) Decrease and the equilibrium quantity of imports will decrease.c) Increase and the equilibrium quantity of imports will decrease.d) Decrease and the equilibrium quantity of imports will increase.

2. If the foreign exchange market is unstable then a depreciation of the US dollara) Can be described by the Marshall-Lerner condition.b) Will not reduce a trade deficit.c) Will not affect the value of exports and imports.d) Will be reversed.

3. The J-curve occurs because in the short runa) Price elasticities are low.b) The Marshall-Lerner condition is met.c) The foreign exchange market is stable.d) Monetary policy is ineffective.

4. The more elastic is a nation's demand and supply of foreign exchange the:

a. larger is the depreciation required to correct a deficit of a given size in the nation's balance of payments b. smaller is the depreciation required to correct a deficit of a given size in the nation's

balance of paymentsc. less feasible is a flexible exchange rate systemd. none of the above

5. A nation's demand curve for foreign exchange is derived from the:

a. foreign demand curve for the nations' exportsb. nation's supply curve of exports

c. demand and supply curves for the nation’s imports in terms of the foreign currencyd. demand and supply curves for the nations’ exports in terms of the foreign currency

6. A depreciation of a nation's currency is:

a. inflationary for the nationb. deflationary for the nationc. deflationary for the trade partnerd. any of the above

7. The foreign exchange market is stable when:a. The demand curve of foreign exchange is negatively inclined and the supply curve of foreign

exchange is positively inclinedb. the supply curve of foreign exchange is negatively inclined and less elastic than the demand curvec. the sum of the absolute values of the elasticity of the nation's demand of imports and the foreign

demand for the nation's exports is greater than one d. all of the above

8. The equilibrium level of national income in an open economy is given by:

a. I + X = S + Mb. X - M = S - Ic. I + (X-M) = S

d. all of the above

9. If MPS=0.2 and MPM=0.3, the foreign trade multiplier is:

a. 5b. 3.3c. 3

d. 2

10. The S-I function rises because:

a. rising I are subtracted from constant S b. constant I are subtracted from rising S

c. rising I are subtracted from rising Sd. constant I are added to falling S

11. An autonomous fall in M from a condition of equilibrium in national income and in thetrade balance results in the nation's income:

a. rising and its trade balance turning to deficitb. falling and its trade balance turning into surplus

c. rising and its trade balance turning into surplusd. rising and the trade balance remaining in equilibrium

12. By itself, the automatic income adjustment mechanism is likely to bring about:

a. incomplete adjustmentb. complete adjustmentc. perverse adjustmentd. any of the above

13. The improvement in a nation's balance of trade and payments resulting from a depreciation of its currency is:

a. reinforced by the induced fall in imports b. partly neutralized by the induced rise in imports

c. partly neutralized by the induced fall in importsd. any of the above.

14. In the real world, the automatic adjustment mechanisms, if allowed to operate, are likely to:

a. reinforce each other but still result in incomplete adjustment b. reinforce each other and result in complete adjustment

c. work at cross purposes from each other and result in incomplete adjustmentd. work at cross purposes from each other and result in perverse adjustment

15. A benefit of automatic adjustment mechanisms is that they:a. avoid the possibility of policy mistakesb. avoid the time lags associated with adjustment policiesc. begin to operate as soon as balance of payments disequilibria develop

d. all of the above

16. In a fixed exchange rate system, which of the following will occur as a result of a US trade deficit?a) Depreciation of the US dollar.b) Appreciation of the US dollar.c) An increase in the US money supply.d) A decrease in the US money supply.

17. Relative to a closed economy an open economy is most likely to have which of the following?a) Fewer kinds of leakages.b) Fewer kinds of injections.c) A lower multiplier.d) Smaller foreign repercussions.

18. If European income increases, leading to an increase in imports from Japan, which of the following is likely?a) Income will fall in Japan.b) The Japanese yen will depreciate if the yen floats.c) The Japanese money supply will fall if the yen is fixed.d) Japanese spending will increase by more than the increase in European imports.

19. A trade deficit will reduce the money supplya) In a flexible exchange rate system.b) In a gold standard.c) If absorption falls.d) If prices fall.

20. In a fixed exchange rate system, a deficit is automatically corrected througha) A decreases in absorption.b) A decrease in income and prices.c) An increase in income and a decrease in prices.d) A decrease in income and an increase in prices.

5. Suppose the components of spending in an economy are as follows.C = 100 + .75YI = 400

M = 50 + .25YX = 300

a) What is the equilibrium level of income?

b) What is the trade balance (X-M) at this equilibrium?

c) Suppose exports increase by 100. What is the new equilibrium level of income?

d) What is the trade balance (X-M) at the new equilibrium? Did the trade balance improve by the increase in exports of 100? Explain.