Chapters 31, 32 & 33 Review Packet
Chapters 31, 32 & 33 Review Packet
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
____ 1. International trade
|a. |raises the standard of living in all trading countries. |
|b. |lowers the standard of living in all trading countries. |
|c. |leaves the standard of living unchanged. |
|d. |raises the standard of living for importing countries and lowers it for exporting countries. |
____ 2. Juan lives in Ecuador and purchases a motorcycle manufactured in the United States. The motorcycle is
|a. |both a U.S. and Ecuadorian export. |
|b. |both a U.S. and Ecuadorian import. |
|c. |a U.S. import and an Ecuadorian export. |
|d. |a U.S. export and an Ecuadorian import. |
____ 3. If U.S. imports total $100 billion and U.S. exports total $150 billion, which of the following is correct?
|a. |The U.S. has a trade surplus of $100 billion. |
|b. |The U.S. has a trade surplus of $50 billion. |
|c. |The U.S. has a trade deficit of $100 billion. |
|d. |The U.S. has a trade deficit of $50 billion. |
____ 4. Sonya, a citizen of Denmark, produces boots and shoes that she sells to department stores in the United States. Other things the same, these sales
|a. |increase U.S. net exports and have no effect on Danish net exports. |
|b. |decrease U.S. net exports and have no effect on Danish net exports. |
|c. |increase U.S. net exports and decrease Danish net exports. |
|d. |decrease U.S. net exports and increase Danish net exports. |
____ 5. About what percentage of GDP are U.S. imports?
|a. |less than 1 percent |
|b. |about 4 percent |
|c. |about 7 percent |
|d. |over 10 percent |
____ 6. Over the last 50 years or so, U.S. exports as a percentage of GDP have approximately
|a. |stayed constant. |
|b. |doubled. |
|c. |tripled. |
|d. |quadrupled. |
____ 7. If a Swiss watchmaker opens a factory in the United States, this is an example of Swiss
|a. |exports. |
|b. |imports. |
|c. |foreign portfolio investment. |
|d. |foreign direct investment. |
____ 8. Net capital outflow equals the difference between a country's
|a. |income and expenditure. |
|b. |investment and saving. |
|c. |buying of foreign goods and services and sales of goods and services abroad. |
|d. |purchases of foreign assets and sales of domestic assets abroad. |
____ 9. A U.S. firm buys sardines from Morocco and pays for them with U.S. dollars. Other things the same, U.S. net exports
|a. |increase, and U.S. net capital outflow increases. |
|b. |increase, and U.S. net capital outflow decreases. |
|c. |decrease, and U.S. net capital outflow increases. |
|d. |decrease, and U.S. net capital outflow decreases. |
____ 10. U.S. based John Deere sells machinery to a South African country that pays with South African currency (the rand).
|a. |This increases U.S. net capital outflow because the U.S. acquires foreign assets. |
|b. |This decreases U.S. net capital outflow because the U.S. acquires foreign assets. |
|c. |This increases U.S. net capital outflow because the U.S. sells capital goods. |
|d. |This decreases U.S. net capital outflow because the U.S. sells capital goods. |
____ 11. A U.S. based company sells semiconductors to an Italian firm. The U.S. company uses all of the revenues from this sale to purchase automobiles from Italian firms. These transactions
|a. |increase both U.S. net exports and U.S. net capital outflow. |
|b. |decrease both U.S. net exports and U.S. net capital outflow. |
|c. |increase U.S. net exports and do not affect U.S. net capital outflow. |
|d. |None of the above is correct. |
____ 12. Bolivia buys railroad engines from a U.S. firm and pays for them with Bolivianos (Bolivian currency). By itself, this transaction
|a. |increases both U.S. net exports and U.S. net capital outflow. |
|b. |decreases both U.S. net exports and U.S. net capital outflow. |
|c. |increases U.S. net exports and does not affect U.S. net capital outflow. |
|d. |None of the above is correct. |
____ 13. If there is a trade deficit, then
|a. |saving is greater than domestic investment and Y > C + I + G. |
|b. |saving is greater than domestic investment and Y < C + I + G. |
|c. |saving is less than domestic investment and Y > C +I + G. |
|d. |saving is less than domestic investment and Y < C + I + G. |
____ 14. In an open economy, gross domestic product equals $1,850 billion, consumption expenditure equals $975 billion, government expenditure equals $225 billion, investment equals $500 billion, and net exports equals $150 billion. What is national savings?
|a. |$0 |
|b. |$500 billion |
|c. |$650 billion |
|d. |$975 billion |
____ 15. After the 1980s, U.S. net capital outflow was
|a. |negative, meaning that foreigners were buying more capital assets from the United States than Americans were buying |
| |abroad. |
|b. |negative, meaning that Americans were buying more capital assets abroad than foreigners were buying from the United |
| |States. |
|c. |positive, meaning that foreigners were buying more capital assets from the United States than Americans were buying |
| |abroad. |
|d. |positive, meaning that Americans were buying more capital assets abroad than foreigners were buying from the United |
| |States. |
____ 16. Most of the change from 2000 to 2004 in U.S. net capital outflow as a percent of GDP was due to a(n)
|a. |decrease in U.S. investment. |
|b. |decrease in U.S. national saving. |
|c. |increase in U.S. investment. |
|d. |increase in U.S. national saving. |
____ 17. If you go to the bank and notice that a dollar buys more Mexican pesos than it used to, then the dollar has
|a. |appreciated. Other things the same, the appreciation would make you less likely to travel to Mexico. |
|b. |appreciated. Other things the same, the appreciation would make you more likely to travel to Mexico. |
|c. |depreciated. Other things the same, the depreciation would make you less likely to travel to Mexico. |
|d. |depreciated. Other things the same, the depreciation would make you more likely to travel to Mexico. |
____ 18. In the United States, a cup of hot chocolate costs $5. In Australia, the same hot chocolate costs $6.5 Australian dollars. If the exchange rate is $1.3 Australian dollars per U.S. dollar, what is the real exchange rate?
|a. |1/2 cup of Australian hot chocolate per cup of U.S. hot chocolate |
|b. |1 cup of Australian hot chocolate per cup of U.S. hot chocolate |
|c. |2 cups of Australian hot chocolate per cup of U.S. hot chocolate |
|d. |None of the above is correct. |
____ 19. The nominal exchange rate is 2 Thai bhat for one U.S. dollar. A sub sandwich combo deal in the U.S. costs $6 dollars in the U.S. and 8 bhat in Thailand. The real exchange rate is
|a. |3/8 |
|b. |2/3 |
|c. |3/2 |
|d. |8/3 |
____ 20. If US goods cost one dollar for each euro German goods costs, the real exchange rate would be computed as how many German goods per U.S. goods?
|a. |one |
|b. |the price of the U.S. goods |
|c. |the amount of euros that can be bought with one unit of U.S. currency |
|d. |None of the above is correct. |
____ 21. Suppose that the real exchange rate between the United States and Vietnam is defined in terms of baskets of goods. Other things the same, which of the following will increase the real exchange rate (that is increase the number of baskets of Vietnamese goods a basket of U.S. goods buys)?
|a. |an increase in the quantity of Vietnamese currency that can be purchased with a dollar |
|b. |an increase in the price of U.S. baskets of goods |
|c. |a decrease in the price in Vietnamese currency of Vietnamese goods |
|d. |All of the above are correct. |
____ 22. An appreciation of the U.S. real exchange rate induces U.S. consumers to buy
|a. |fewer domestic goods and fewer foreign goods. |
|b. |more domestic goods and fewer foreign goods. |
|c. |fewer domestic goods and more foreign goods. |
|d. |more domestic goods and more foreign goods. |
____ 23. If the U.S. real exchange rate appreciates relative to the euro, U.S. exports to Europe
|a. |and European exports to the U.S. both rise. |
|b. |and European exports to the U.S. both fall. |
|c. |rise, and European exports to the U.S. fall. |
|d. |fall, and European exports to the U.S. rise. |
____ 24. Purchasing-power parity describes the forces that determine
|a. |prices in the short run. |
|b. |prices in the long run. |
|c. |exchange rates in the short run. |
|d. |exchange rates in the long run. |
____ 25. If purchasing-power parity holds, a dollar will buy
|a. |more goods in foreign countries than in the United States. |
|b. |as many goods in foreign countries as it does in the United States. |
|c. |fewer goods in foreign countries than it does in the United States. |
|d. |None of the above is implied by purchasing-power parity. |
____ 26. Suppose that the exchange rate is 66 Bangladesh taka per dollar, that a bushel of rice costs 186 taka in Bangladesh and $3 in the United States. Then the real exchange rate is
|a. |greater than one and arbitrageurs could profit by buying rice in the United States and selling it in Bangladesh. |
|b. |greater than one and arbitrageurs could profit by buying rice in Bangladesh and selling it in the United States. |
|c. |less than one and arbitrageurs could profit by buying rice in the United States and selling it in Bangladesh. |
|d. |less than one and arbitrageurs could profit by buying rice in Bangladesh and selling it in the United States. |
____ 27. Suppose that the exchange rate is 9 Moroccan dirhams per U.S. dollar. Also suppose that you can buy a crate of oranges for 360 dirhams in the Moroccan capital of Rabat and can buy a similar crate of oranges in Miami for $35 dollars.
|a. |The real exchange rate is greater than one and arbitrageurs could profit by buying oranges in the United States and |
| |selling them in Morocco. |
|b. |The real exchange rate is greater than one and arbitrageurs could profit by buying oranges in Morocco and selling them |
| |in the United States. |
|c. |The real exchange rate is less than one and arbitrageurs could profit by buying oranges in the United States and selling|
| |them in Morocco. |
|d. |The real exchange rate is less than one and arbitrageurs could profit by buying oranges in Morocco and selling them in |
| |the United States. |
Use the (hypothetical) information in the following table to answer the following questions.
Table 31-1
| | |Currency per |U.S. Price |Country Price |
|Country |Currency |U.S. Dollar |Index |Index |
|Bolivia |boloviano | 8.00 |200 | 1600 |
|Japan |yen |125.00 |200 |50,000 |
|Morocco |dinar | 10.00 |200 | 2,000 |
|Norwegian |kroner | 6.5 |200 | 1,500 |
|Thailand |baht | 40.00 |200 | 7,000 |
____ 28. Refer to Table 31-1. Which currency(ies) is(are) more valuable than predicted by the doctrine of purchasing-power parity?
|a. |boloviano and dinar |
|b. |yen, kroner, and baht |
|c. |yen and kroner |
|d. |baht |
____ 29. When a country's central bank increases the money supply, a unit of money
|a. |gains value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.|
|b. |gains value in terms of the domestic goods and services it can buy, but loses value in terms of the foreign currency it |
| |can buy. |
|c. |loses value in terms of the domestic goods and services it can buy, but gains value in terms of the foreign currency it |
| |can buy. |
|d. |loses value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.|
____ 30. Suppose the Kenyan nominal exchange rate declines, and prices are unchanged in Kenya and abroad. Based on this information, the Kenyan real exchange rate
|a. |does not change. |
|b. |rises. |
|c. |declines |
|d. |None of the above is necessarily correct. |
____ 31. Suppose the Canadian nominal exchange rate does not change, but prices rise faster in Canada than in all other countries. Based on this information, the Canadian real exchange rate
|a. |does not change. |
|b. |rises. |
|c. |declines. |
|d. |There is not enough information to answer the question |
____ 32. If the U.S. price level is increasing by 3 percent annually and the Swiss price level is increasing by 5 percent annually, by what percent would the dollar price of francs need to change according to purchasing power parity?
|a. |decrease by 5 percent |
|b. |decrease by 2 percent |
|c. |increase by 5 percent |
|d. |increase by 2 percent |
____ 33. From 1970 to 1998 the U.S. dollar
|a. |gained value compared to the German mark because inflation was higher in Germany. |
|b. |gained value compared to the German mark because inflation was lower in Germany. |
|c. |lost value compared to the German mark because inflation was higher in Germany. |
|d. |lost value compared to the German mark because inflation was lower in Germany. |
____ 34. From 1970 to 1998 the U.S. dollar
|a. |gained value compared to the Italian lira because inflation was higher in the U.S. |
|b. |gained value compared to the Italian lira because inflation was lower in the U.S. |
|c. |lost value compared to the Italian lira because inflation was higher in the U.S. |
|d. |lost value compared to the Italian lira because inflation was lower in the U.S. |
____ 35. If a McDonald's Big Mac cost $3.06 in the United States and 3.21 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?
|a. |1.05 If the value is less than this, it costs more dollars to buy a Big Mac in the U.S. than in the Euro area. |
|b. |1.05 If the value is less than this, it costs fewer dollars to buy a Big Mac in the U.S. then in the Euro area. |
|c. |.95 If the value is less than this, it costs more dollars to buy a Big Mac in the U.S. than in the Euro area. |
|d. |.95 If the value is less than this, it costs fewer dollars to buy a Big Mac in the U.S. than in the Euro area. |
____ 36. The open-economy macroeconomic model takes
|a. |GDP, but not the price level as given. |
|b. |the price level, but not GDP as given. |
|c. |both the price level and GDP as given. |
|d. |the price level and GDP as variables to be determined by the model. |
____ 37. In an open economy, the market for loanable funds equates national saving with
|a. |domestic investment. |
|b. |net capital outflow. |
|c. |the sum of national consumption and government spending. |
|d. |the sum of domestic investment and net capital outflow. |
____ 38. In an open economy, the market for loanable funds equates national saving with
|a. |domestic investment. |
|b. |net capital outflow. |
|c. |national consumption minus domestic investment. |
|d. |None of the above is correct. |
____ 39. A fall in the real interest rate
|a. |increases the quantity of loanable funds demanded because firms will want to borrow more |
|b. |decreases the quantity of loanable funds demanded because firms will want to borrow less. |
|c. |increases the quantity of loanable funds supplied because firms will want to borrow more. |
|d. |decreases the quantity of loanable funds supplied because firms will want to borrow less. |
____ 40. Which of the following would be consistent with an increase in the U.S. real interest rate?
|a. |a Swiss bank purchases a U.S. bond instead of the German bond it had considered purchasing. |
|b. |firms decide to do more investment spending. |
|c. |a U.S. citizen decides to put less money in his savings account than he had planned to. |
|d. |All of the above are consistent. |
____ 41. If interest rates rose more in France than in the U.S., then other things the same
|a. |U.S. citizens would buy more French bonds and French citizens would buy more U.S. bonds. |
|b. |U.S. citizens would buy more French bonds and French citizens would buy fewer U.S. bonds. |
|c. |U.S. citizens would buy fewer French bonds and French citizens would buy more U.S. bonds. |
|d. |U.S. citizens would buy fewer French bonds and French citizens would buy fewer U.S. bonds. |
____ 42. If there is a surplus of loanable funds, the quantity demanded is
|a. |greater than the quantity supplied and the interest rate will rise. |
|b. |greater than the quantity supplied and the interest rate will fall. |
|c. |less than the quantity supplied and the interest rate will rise. |
|d. |less than the quantity supplied and the interest rate will fall. |
____ 43. If net exports are negative, then
|a. |net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought by |
| |foreigners. |
|b. |net capital outflow is positive, so American assets bought by foreigners are greater than foreign assets bought by |
| |Americans. |
|c. |net capital outflow is negative, so foreign assets bought by Americans are greater than American assets bought by |
| |foreigners. |
|d. |net capital outflow is negative, so American assets bought by foreigners are greater than foreign assets bought by |
| |Americans. |
____ 44. Which of the following is included in the demand for dollars in the market for foreign-currency exchange in the open-economy macroeconomic model?
|a. |A firm in Mexico wants to buy corn from a U.S. firm. |
|b. |A Japanese bank desires to purchase U.S. Treasury securities. |
|c. |An U.S. citizen wants to buy a bond issued by a Mexican corporation. |
|d. |All of the above are correct. |
____ 45. The real exchange rate measures the
|a. |price of domestic currency relative to foreign currency. |
|b. |price of domestic goods relative to the price of foreign goods. |
|c. |rate of domestic and foreign interest. |
|d. |None of the above is correct. |
____ 46. In the open-economy macroeconomic model, equilibrium is determined by the equality between the supply of dollars which comes from
|a. |U.S. national saving and the demand for dollars for U.S. net exports. |
|b. |U.S. net capital outflow and the demand for dollars for U.S. net exports. |
|c. |domestic investment and the demand for U.S. net exports. |
|d. |foreign demand for U.S. goods and U.S. demand for foreign goods. |
____ 47. Net capital outflow
|a. |is a source of the supply of loanable funds, and the source of the supply of dollars in the foreign exchange market. |
|b. |is a source of the supply of loanable funds, and a source of the demand for dollars in the foreign exchange market. |
|c. |is a part of the demand for loanable funds, and the source of the supply of dollars in the foreign exchange market. |
|d. |is a part of the demand for loanable funds, and a source of the demand for dollars in the foreign exchange market. |
____ 48. In the open-economy macroeconomic model, the key determinant of net capital outflow is the
|a. |nominal exchange rate. |
|b. |nominal interest rate. |
|c. |real exchange rate. |
|d. |real interest rate. |
____ 49. In the open-economy macroeconomic model, if the supply of loanable funds increases, the interest rate
|a. |and the real exchange rate increase. |
|b. |and the real exchange rate decrease. |
|c. |increases and the real exchange rate decreases. |
|d. |decreases and the real exchange rate increases. |
____ 50. Suppose that the government of Syria raises its budget deficit. The real exchange rate of the Syrian pound would
|a. |depreciate and Syrian net exports would rise. |
|b. |depreciate and Syrian net exports would fall. |
|c. |appreciate and Syrian net exports would rise. |
|d. |appreciate and Syrian net exports would fall. |
____ 51. If a government increases its budget deficit, then interest rates
|a. |and domestic investment rise. |
|b. |and domestic investment falls. |
|c. |rise and domestic investment falls. |
|d. |fall and domestic investment rises. |
____ 52. If a government increases its budget deficit, then interest rates
|a. |rise and the real exchange rate appreciates. |
|b. |fall and the real exchange rate depreciates. |
|c. |rise and the real exchange rate depreciates. |
|d. |fall and the real exchange rate appreciates. |
____ 53. If a government increases its budget deficit, then the real exchange rate
|a. |and domestic investment rise. |
|b. |and domestic investment fall. |
|c. |rises and domestic investment falls. |
|d. |falls and domestic investment rises. |
____ 54. If a government of a country with a zero trade balance increases its budget deficit, then the real exchange rate
|a. |appreciates and there is a trade surplus. |
|b. |appreciates and there is a trade deficit. |
|c. |depreciates and there is a trade surplus. |
|d. |depreciates and there is a trade deficit. |
____ 55. Which of the following would not be a consequence of an increase in the U.S. government budget deficit?
|a. |U.S. interest rates rise. |
|b. |U.S. net capital outflow falls. |
|c. |The real exchange rate of the U.S. dollar depreciates. |
|d. |The U.S. supply of loanable funds shifts left. |
____ 56. From 2001 to 2004, the U.S. government went from a budget surplus to a budget deficit. Other things the same, this would have decreased
|a. |both the supply of loanable funds and the supply of dollars in the market for foreign-currency exchange. |
|b. |neither the supply of loanable funds nor the supply of dollars in the market for foreign-currency exchange. |
|c. |the supply of loanable funds but not the supply of dollars in the market for foreign-currency exchange. |
|d. |the supply of dollars in the market for foreign-currency exchange, but not the supply of loanable funds. |
Figure 32-4
[pic]
____ 57. Refer to Figure 32-4. The initial effect of an increase in the budget deficit in the loanable funds market is illustrated as a move from
|a. |a to b. |
|b. |a to c. |
|c. |c to b. |
|d. |c to d. |
____ 58. Suppose that the U.S. imposed an import quota on beef. Sales of U.S. beef producers would
|a. |rise and exports of other industries would increase. |
|b. |rise and exports of other industries would decline. |
|c. |not change, exports of other industries would increase. |
|d. |not change, exports of other industries would decline. |
Figure 32-5
[pic]
____ 59. Refer to Figure 32-5. Which of the following shifts show the effects of an import quota?
|a. |shifting the middle supply curve in panel c to the one to its left. |
|b. |shifting the demand curve from the right to the left in panel c. |
|c. |shifting the demand curve from the left to the right in panel c. |
|d. |None of the above is correct. |
____ 60. When a country suffers from capital flight, the demand for loanable funds in that country shifts
|a. |right, which increases interest rates in that country. |
|b. |right, which decreases interest rates in that country. |
|c. |left, which increases interest rates in that country. |
|d. |left, which decreases interest rates in that country. |
____ 61. When Mexico suffered from capital flight in 1994, the U.S. real interest rate
|a. |rose and the real exchange rate of the dollar appreciated. |
|b. |rose and the real exchange rate of the dollar depreciated. |
|c. |fell and the real exchange rate of the dollar appreciated. |
|d. |fell and the real exchange rate of the dollar depreciated. |
____ 62. The country of Meditor is politically very stable and has a long tradition of respecting property rights. If several other countries suddenly became politically unstable, we would expect Meditor’s
|a. |real interest rate to rise. |
|b. |real exchange rate to fall. |
|c. |net exports to fall. |
|d. |None of the above is likely. |
The diagram below represents the market for loanable funds and the market for foreign-currency exchange in Mexico. Use the diagram to answer the following questions.
Figure 32-6
[pic]
____ 63. Refer to Figure 32-6. Which of the following is consistent with capital flight from Mexico?
|a. |The real exchange rate of the peso appreciates from E0 to E1. |
|b. |The real exchange rate of the peso depreciates from E0 to E1. |
|c. |The real exchange rate of the peso appreciates from E1 to E0. |
|d. |The real exchange rate of the peso depreciates from E1 to E0. |
____ 64. Which of the following would cause the real exchange rate of the U.S. dollar to depreciate?
|a. |the U.S. government budget deficit increases |
|b. |capital flight from the United States |
|c. |the U.S. imposes import quotas |
|d. |None of the above is correct. |
____ 65. Which of the following will not change the U.S. real interest rate?
|a. |capital flight from the United States |
|b. |the government budget deficit increases |
|c. |the U.S. imposes import quotas |
|d. |None of the above is correct. |
____ 66. If U.S. citizens decide to save a larger fraction of their incomes, the real interest rate
|a. |decreases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases. |
|b. |decreases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow decreases. |
|c. |increases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow decreases. |
|d. |increases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases. |
Consider the exhibit below for the following questions.
Figure 33-1
[pic]
____ 67. Refer to Figure 33-1. If the economy is at A and there is a fall in aggregate demand, in the short run the economy
|a. |stays at A. |
|b. |moves to B. |
|c. |moves to C. |
|d. |moves to D. |
The Stock Market Boom of 2010
Imagine that in 2010 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time.
____ 68. Refer to Stock Market Boom 2010. In the short run what happens to the price level and real GDP?
|a. |both the price level and real GDP rise. |
|b. |both the price level and real GDP fall. |
|c. |the price level rises and real GDP falls. |
|d. |the price level falls and real GDP rises. |
Optimism
Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time.
____ 69. Refer to Optimism. In the short run what happens to the price level and real GDP?
|a. |both the price level and real GDP rise. |
|b. |both the price level and real GDP fall. |
|c. |the price level rises and real GDP falls. |
|d. |the price level falls and real GDP rises. |
____ 70. During World War II, the economy's production increased about
|a. |25 percent and prices rose about 5 percent. |
|b. |50 percent and prices rose about 10 percent. |
|c. |75 percent and prices rose about 15 percent. |
|d. |100 percent and prices rose about 20 percent. |
____ 71. Which of the following would cause stagflation?
|a. |aggregate demand shifts right |
|b. |aggregate demand shifts left |
|c. |aggregate supply shifts right |
|d. |aggregate supply shifts left |
____ 72. Imagine the U.S. economy is in long-run equilibrium. Then suppose the value of the U.S. dollar increases. At the same time, people in the U.S. revise their expectations so that the expected price level falls. We would expect that in the short-run
|a. |real GDP will rise and the price level might rise, fall, or stay the same. |
|b. |real GDP will fall and the price level might rise, fall, or stay the same. |
|c. |the price level will rise, and real GDP might rise, fall, or stay the same. |
|d. |the price level will fall, and real GDP might rise, fall, or stay the same. |
____ 73. Suppose the economy is in long-run equilibrium. If there is a tax cut at the same time that major new sources of oil are discovered in the country, then in the short-run we would expect
|a. |real GDP will rise and the price level might rise, fall, or stay the same. |
|b. |real GDP will fall and the price level might rise, fall, or stay the same. |
|c. |the price level will rise, and real GDP might rise, fall, or stay the same. |
|d. |the price level will fall, and real GDP might rise, fall, or stay the same. |
____ 74. Suppose the economy is in long-run equilibrium. Concerns about pollution cause the government to significantly restrict the production of electricity. At the same time, the value of the dollar falls. In the short-run we would expect
|a. |real GDP will rise and the price level might rise, fall, or stay the same. |
|b. |real GDP will fall and the price level might rise, fall, or stay the same. |
|c. |the price level will rise, and real GDP might rise, fall, or stay the same. |
|d. |the price level will fall, and real GDP might rise, fall, or stay the same. |
____ 75. The recessions of the 1970s are often attributed to
|a. |declining inflation expectations. |
|b. |an increase in oil prices. |
|c. |declines in the price of stock. |
|d. |decreases in the money supply. |
____ 76. Which of the following explains why production rises in most years?
|a. |increases in the labor force |
|b. |increases in the capital stock |
|c. |advances in technological knowledge |
|d. |All of the above are correct. |
____ 77. During a recession the economy experiences
|a. |rising employment and income. |
|b. |rising employment and falling income. |
|c. |rising income and falling employment. |
|d. |falling employment and income. |
____ 78. Most economists use the aggregate demand and aggregate supply model primarily to analyze
|a. |short-run fluctuations in the economy. |
|b. |the effects of macroeconomic policy on the prices of individual goods. |
|c. |the long-run effects of international trade policies. |
|d. |productivity and economic growth. |
____ 79. Real GDP
|a. |moves in the same direction as unemployment. |
|b. |is not adjusted for inflation. |
|c. |also measures real income. |
|d. |All of the above are correct. |
____ 80. The classical dichotomy refers to the separation of
|a. |variables that move with the business cycle and variables that do not. |
|b. |changes in money and changes in government expenditures. |
|c. |decisions made by the public and decisions made by the government. |
|d. |real and nominal variables. |
____ 81. The quantity of money has no real impact on things people really care about like whether or not they have a job. Most economists would agree that this statement is appropriate concerning
|a. |both the short run and the long run. |
|b. |the short run, but not the long run. |
|c. |the long run, but not the short run. |
|d. |neither the long run nor the short run. |
____ 82. Classical economist David Hume observed that as the money supply expanded after gold discoveries it took some time for prices to rise and in the meantime the economy enjoyed higher employment and production. This is inconsistent with monetary neutrality because
|a. |monetary neutrality would mean that neither prices nor production should have risen. |
|b. |monetary neutrality would mean that production should have risen, but prices should not have. |
|c. |monetary neutrality would mean the prices should have risen, but production should not have changed. |
|d. |monetary neutrality would mean that prices and production should both have fallen. |
____ 83. The average price level is measured by
|a. |any real variable. |
|b. |the rate of inflation. |
|c. |the level of the money supply. |
|d. |the CPI or the GDP deflator. |
____ 84. As the price level rises
|a. |people will want to buy more bonds, so the interest rate rises. |
|b. |people will want to buy fewer bonds, so the interest rate falls. |
|c. |people will want to buy more bonds, so the interest rate falls. |
|d. |people will want to buy fewer bonds, so the interest rate rises. |
____ 85. Which of the following is included in the aggregate demand for goods and services?
|a. |consumption demand |
|b. |investment demand |
|c. |net exports |
|d. |All of the above are correct. |
____ 86. Other things the same, as the price level falls, the real value of a dollar
|a. |rises, and interest rates rise. |
|b. |rises, and interest rates fall. |
|c. |falls, and interest rates rise. |
|d. |falls, and interest rates fall. |
____ 87. Other things the same, an increase in the price level makes the dollars people hold worth
|a. |more, so they spend more. |
|b. |more, so they spend less. |
|c. |less, so they spend more. |
|d. |less, so they spend less. |
____ 88. Other things the same, if the price level rises, households
|a. |increase foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange increases. |
|b. |increase foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange decreases. |
|c. |decrease foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange increases. |
|d. |decrease foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange decreases. |
____ 89. Other things the same, the aggregate quantity of goods demanded decreases if
|a. |real wealth falls. |
|b. |the interest rate rises. |
|c. |the dollar appreciates. |
|d. |All of the above are correct. |
____ 90. Other things the same, when the price level falls, interest rates
|a. |rise, so firms increase investment. |
|b. |rise, so firms decrease investment. |
|c. |fall, so firms increase investment. |
|d. |fall, so firms decrease investment. |
____ 91. Other things the same, as the price level falls, which of the following increases?
|a. |lending and investment spending |
|b. |lending, but not investment spending |
|c. |investment spending, but not lending |
|d. |neither investment spending nor lending |
____ 92. Other things the same, a decrease in the U.S. price level leads to
|a. |a rise in U.S. interest rates and increased demand for foreign bonds. |
|b. |a rise in U.S. interest rates and decreased demand for foreign bonds. |
|c. |a fall in U.S. interest rates and increased demand for foreign bonds. |
|d. |a fall in U.S. interest rates and decreased demand for foreign bonds. |
____ 93. An increase in the price level causes the interest rate to
|a. |increase, the dollar to depreciate, and net exports to increase. |
|b. |increase, the dollar to appreciate, and net exports to decrease. |
|c. |decrease, the dollar to depreciate, and net exports to increase. |
|d. |decrease, the dollar to appreciate, and net exports to decrease. |
____ 94. Other things the same, as the price level decreases it induces greater spending on
|a. |both net exports and investment. |
|b. |net exports but not investment. |
|c. |investment but not net exports. |
|d. |neither net exports nor investment. |
____ 95. Changes in the price level affect which components of aggregate demand?
|a. |only consumption and investment |
|b. |only consumption and net exports |
|c. |only investment |
|d. |consumption, investment, and net exports |
____ 96. From 2001 to 2005 there was a dramatic rise in the price of houses. If this made people feel wealthier, then it would shift
|a. |aggregate demand right. |
|b. |aggregate demand left. |
|c. |aggregate supply right. |
|d. |aggregate supply left. |
____ 97. The initial impact of the repeal of an investment tax credit is to shift
|a. |aggregate demand right. |
|b. |aggregate demand left. |
|c. |aggregate supply right. |
|d. |aggregate supply left. |
____ 98. Other things the same, an increase in the amount of capital firms wish to purchase would initially shift
|a. |aggregate demand right. |
|b. |aggregate demand left. |
|c. |aggregate supply right. |
|d. |aggregate supply left. |
____ 99. If businesses in general decide that they have overbuilt and so now have too much capital, their response to this would initially shift
|a. |aggregate demand right. |
|b. |aggregate demand left. |
|c. |aggregate supply right. |
|d. |aggregate supply left. |
____ 100. Imagine that businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases. Their reaction would initially shift
|a. |aggregate demand right. |
|b. |aggregate demand left. |
|c. |aggregate supply right. |
|d. |aggregate supply left. |
____ 101. When taxes decrease, consumption
|a. |increases, so aggregate demand shifts right. |
|b. |increases, so aggregate supply shifts right. |
|c. |decreases, so aggregate demand shifts left. |
|d. |decreases, so aggregate supply shifts left. |
____ 102. An increase in the money supply
|a. |and the investment tax credit both cause aggregate demand to shift right. |
|b. |and the investment tax credit both cause aggregate demand to shift left. |
|c. |causes aggregate demand to shift right, while the investment tax credit causes aggregate demand to shift left. |
|d. |causes aggregate demand to shift left, while the investment tax credit causes aggregate demand to shift right. |
____ 103. Which of the following shifts aggregate demand to the left?
|a. |The price level rises. |
|b. |The price level falls. |
|c. |The dollar depreciates for some reason other than a change in the price level. |
|d. |Stock prices fall for some reason other than a change in the price level. |
____ 104. Aggregate demand shifts right when the government
|a. |raises personal income taxes. |
|b. |increases the money supply. |
|c. |repeals an investment tax credit. |
|d. |All of the above are correct. |
____ 105. If people want to save more for retirement
|a. |or if the government raises taxes, aggregate demand shifts right. |
|b. |or if the government raises taxes, aggregate demand shifts left. |
|c. |aggregate demand shifts right. If the government raises taxes, aggregate demand shifts left. |
|d. |aggregate demand shifts left. If the government raises taxes, aggregate demand shifts right. |
____ 106. At the end of World War II many European countries were rebuilding and so were eager to buy capital goods and had rising incomes. We would expect that the rebuilding increased aggregate demand in
|a. |both the United States and Europe. |
|b. |the United States but not Europe. |
|c. |Europe, but not the United States. |
|d. |neither the United States, nor Europe. |
____ 107. If the dollar appreciates because of speculation or government policy
|a. |or if other countries experience recessions, aggregate demand shifts right in the United States. |
|b. |or if other countries experience recessions, aggregate demand shifts left in the United States. |
|c. |aggregate demand shifts right in the United States. If other countries experience recessions aggregate demand shifts |
| |left in the United States. |
|d. |aggregate demand shifts left in the United States. If other countries experience recessions aggregate demand shifts |
| |right in the United States. |
____ 108. The aggregate supply curve is upward sloping rather than vertical in
|a. |the short and long run. |
|b. |neither the short nor the long run. |
|c. |the long run, but not the short run. |
|d. |the short run, but not the long run. |
____ 109. Which of the following is not a determinant of the long-run level of real GDP?
|a. |the price level |
|b. |the supply of labor |
|c. |available natural resources |
|d. |available technology |
____ 110. The long-run aggregate supply curve
|a. |is vertical. |
|b. |is a graphical representation of the classical dichotomy. |
|c. |indicates monetary neutrality in the long run. |
|d. |All of the above are correct. |
____ 111. The long-run aggregate supply curve would shift right if the government were to
|a. |increase the minimum-wage. |
|b. |make unemployment benefits more generous. |
|c. |raise taxes on investment spending. |
|d. |None of the above is correct. |
____ 112. Which of the following shifts the long-run aggregate supply curve to the left?
|a. |either an increase in the price of imported natural resources or opening up international trade |
|b. |neither an increase in the price of imported natural resources or opening up international trade |
|c. |an increase in the price of imported natural resources, but not opening up international trade |
|d. |opening up international trade, but not an increase in the price of imported natural resources |
____ 113. Some countries have high minimum wages and require a lengthy and costly process to get permission to open a business
|a. |Reducing either the minimum wage or the time and cost to open a business would have no effect on the long-run aggregate |
| |supply curve. |
|b. |Reducing the minimum wage and the time and cost to open a business would both shift the long-run aggregate supply curve |
| |to the right. |
|c. |Reducing the minimum wage would shift long-run aggregate supply to the right. Reducing the time and cost to open a |
| |business would have no affect on the long-run aggregate supply curve. |
|d. |Reducing the minimum wage would have no affect on the long-run aggregate supply curve. Reducing the time and cost to |
| |open a business would shift the long-run aggregate supply curve to the right. |
____ 114. Other things the same, if the long-run aggregate supply curve shifts right, prices
|a. |and output both increase. |
|b. |and output both decrease. |
|c. |increase and output decreases. |
|d. |decrease and output increases. |
____ 115. Over the last fifty years both real GDP and prices have trended upward in most countries. Continuing real GDP growth and inflation can be explained by
|a. |continuing technological progress alone. |
|b. |continuing increases in the money supply alone. |
|c. |continued technological progress and continuing increases in the money supply. |
|d. |None of the above can explain continuing real GDP growth and inflation. |
____ 116. Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this
|a. |it is only necessary that long-run aggregate supply shifts right over time. |
|b. |it is only necessary that aggregate demand shifts right over time. |
|c. |both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must shift farther. |
|d. |None of the above cases would produce rising prices and growing real GDP over time. |
____ 117. The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,
|a. |production is more profitable and employment rises. |
|b. |production is more profitable and employment falls. |
|c. |production is less profitable and employment rises. |
|d. |production is less profitable and employment falls. |
____ 118. The sticky-price theory of the short-run aggregate supply curve says that when the price level is higher than expected, some firms will have
|a. |higher than desired prices which increases their sales. |
|b. |higher than desired prices which depresses their sales. |
|c. |lower than desired prices which increases their sales. |
|d. |lower than desired prices which depresses their sales. |
____ 119. According to the misperceptions theory of aggregate supply, if a firm thought that inflation was going to be 5 percent and actual inflation was 6 percent, then the firm would believe that the relative price of what they produce had
|a. |increased, so they would increase production. |
|b. |increased, so they would decrease production. |
|c. |decreased, so they would increase production. |
|d. |decreased, so they would decrease production. |
____ 120. Which of the following shifts short-run aggregate supply right?
|a. |an increase in the price level |
|b. |an increase in the minimum wage |
|c. |a decrease in the price of oil |
|d. |more people migrate abroad than immigrate from abroad |
Short Answer
121. List the factors that might influence a country's exports, imports, and trade balance.
122. Suppose that Bill, a resident of the U.S., buys software from a company in Japan. Explain why and in what directions this changes U.S. net exports and U.S. net capital outflow.
123. Colonial America had little industry and so had mostly raw materials to export. At the same time, there were many opportunities to purchase capital goods and earn a high rate of return because there was little existing capital so that the marginal product of capital was relatively high. What does this suggest about net exports and net capital outflow in colonial America?
124. Derive the relation between savings, domestic investment, and net capital outflow using the national income accounting identity.
125. Suppose that a country has $120 billion of national savings, and $80 billion of domestic investment. Is this possible? Where did the other $40 billion of national savings go?
126. How do we find the real exchange rate from the nominal exchange rate?
127. What is the logic behind the theory of purchasing-power parity?
128. Suppose that a U.S. dollar buys more gold in Australia than it buys in Russia. What does purchasing-power parity imply should happen?
129. What does purchasing-power parity imply about the real exchange rate?
130. Suppose that money supply growth continues to be higher in Turkey than it is in the United States. What does purchasing-power parity imply will happen to the real and to the nominal exchange rate?
131. Assuming all other things equal, what would happen to the U.S. dollar real exchange rate under each of the following circumstances?
|a. |The U.S. nominal exchange rate depreciates. |
|b. |U.S. domestic prices increase. |
|c. |Prices in the rest of the world rise. |
132. Suppose a lobster supper in Maine costs fewer dollars than a Lobster supper in Paris, France. Explain why this is inconsistent with purchasing-power parity and explain why the inconsistency may exist.
133. Why do higher real interest rates lead to lower net capital outflow?
134. State what, if anything, each of the following does to the supply or demand of loanable funds.
|a. |net capital outflow increases at each interest rate |
|b. |domestic investment increases at each interest rate |
|c. |the government deficit increases |
|d. |private saving increases |
135. Suppose that U.S. investors decide that investment opportunities in African countries have improved. What happens to U.S. net capital outflow? What happens to the U.S. real interest rate?
136. How are the identities S = NCO + I and NCO = NX related to the foreign currency exchange market and the loanable funds market?
137. Suppose that U.S. citizens start saving more. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate?
138. What effect do protectionist policies have on the trade deficit?
139. Fill in the table below with the direction of the variables that change in response to the events in the first column.
| | | | |U.S. real | |
| | | |U.S. net |exchange rate | |
| |U.S. real |U.S. domestic |capital |of domestic |U.S. trade |
| |interest rate |investment |outflow |currency |balance |
|U.S. government | | | | | |
|budget deficit | | | | | |
|increases | | | | | |
|U.S. imposes | | | | | |
|import quotas | | | | | |
|capital flight | | | | | |
|from the United | | | | | |
|States | | | | | |
Chapters 31, 32 & 33 Review Packet
Answer Section
MULTIPLE CHOICE
1. ANS: A DIF: 1 REF: 31-1 TOP: International trade
MSC: Definitional
2. ANS: D DIF: 1 REF: 31-1 TOP: Exports, Imports
MSC: Definitional
3. ANS: B DIF: 1 REF: 31-1 TOP: Net exports
MSC: Applicative
4. ANS: D DIF: 1 REF: 31-1 TOP: Net exports
MSC: Definitional
5. ANS: D DIF: 2 REF: 31-1 TOP: U.S. trade
MSC: Definitional
6. ANS: B DIF: 1 REF: 31-1 TOP: U.S. trade
MSC: Definitional
7. ANS: D DIF: 1 REF: 31-1 TOP: Foreign direct investment
MSC: Interpretive
8. ANS: D DIF: 1 REF: 31-1 TOP: Net capital outflow
MSC: Definitional
9. ANS: D DIF: 2 REF: 31-1 TOP: Net capital outflow, Net exports
MSC: Applicative
10. ANS: A DIF: 2 REF: 31-1 TOP: Net capital outflow
MSC: Definitional
11. ANS: D DIF: 2 REF: 31-1 TOP: Net exports, Net capital outflow
MSC: Applicative
12. ANS: A DIF: 2 REF: 31-1 TOP: Net exports, Net capital outflow
MSC: Applicative
13. ANS: D DIF: 2 REF: 31-1 TOP: National accounts
MSC: Definitional
14. ANS: C DIF: 2 REF: 31-1 TOP: National accounts, National saving
MSC: Analytical
15. ANS: A DIF: 2 REF: 31-1 TOP: U.S. trade
MSC: Definitional
16. ANS: B DIF: 2 REF: 31-1 TOP: U.S. trade
MSC: Definitional
17. ANS: B DIF: 1 REF: 31-2 TOP: Nominal exchange rate
MSC: Definitional
18. ANS: B DIF: 2 REF: 31-2 TOP: Real exchange rate
MSC: Analytical
19. ANS: C DIF: 2 REF: 31-3 TOP: Real exchange rate
MSC: Analytical
20. ANS: C DIF: 2 REF: 31-2 TOP: Real exchange rate
MSC: Analytical
21. ANS: D DIF: 2 REF: 31-2 TOP: Real exchange rate
MSC: Analytical
22. ANS: C DIF: 1 REF: 31-2 TOP: Appreciation, Real exchange rate
MSC: Applicative
23. ANS: D DIF: 2 REF: 31-2 TOP: Appreciation, Net exports
MSC: Applicative
24. ANS: D DIF: 1 REF: 31-3 TOP: Purchasing-power parity
MSC: Definitional
25. ANS: B DIF: 1 REF: 31-3 TOP: Purchasing-power parity
MSC: Definitional
26. ANS: B DIF: 3 REF: 31-3 TOP: Arbitrage, Real exchange rate
MSC: Analytical
27. ANS: C DIF: 3 REF: 31-3 TOP: Arbitrage, Real exchange rate
MSC: Analytical
28. ANS: C DIF: 3 REF: 31-3 TOP: Purchasing-power parity
MSC: Analytical
29. ANS: D DIF: 3 REF: 31-3 TOP: Purchasing-power parity
MSC: Applicative
30. ANS: C DIF: 3 REF: 31-3 TOP: Real exchange rate
MSC: Analytical
31. ANS: B DIF: 3 REF: 31-3 TOP: Real exchange rate
MSC: Analytical
32. ANS: B DIF: 2 REF: 31-3 TOP: Purchasing-power parity
MSC: Analytical
33. ANS: D DIF: 2 REF: 31-3
TOP: U.S. exchange rates, Purchasing-power parity MSC: Definitional
34. ANS: B DIF: 2 REF: 31-3
TOP: U.S. exchange rates, Purchasing-power parity MSC: Definitional
35. ANS: B DIF: 2 REF: 31-3
TOP: Purchasing-power parity, Big Mac index MSC: Analytical
36. ANS: C DIF: 1 REF: 32-1
TOP: Open-economy macroeconomic model MSC: Definitional
37. ANS: D DIF: 1 REF: 32-1 TOP: Market for loanable funds
MSC: Interpretive
38. ANS: D DIF: 1 REF: 32-1 TOP: Market for loanable funds
MSC: Interpretive
39. ANS: A DIF: 1 REF: 32-1 TOP: Market for loanable funds
MSC: Applicative
40. ANS: A DIF: 1 REF: 32-1 TOP: Market for loanable funds
MSC: Applicative
41. ANS: B DIF: 1 REF: 32-1 TOP: Market for loanable funds
MSC: Applicative
42. ANS: D DIF: 2 REF: 32-1 TOP: Market for loanable funds
MSC: Analytical
43. ANS: D DIF: 2 REF: 32-1 TOP: Net exports, Net capital outflow
MSC: Interpretive
44. ANS: A DIF: 3 REF: 32-1
TOP: Market for foreign-currency exchange MSC: Interpretive
45. ANS: B DIF: 1 REF: 32-1 TOP: Real exchange rate
MSC: Definitional
46. ANS: B DIF: 2 REF: 32-1
TOP: Market for foreign-currency exchange MSC: Definitional
47. ANS: C DIF: 1 REF: 32-2
TOP: Open-economy macroeconomic model MSC: Interpretive
48. ANS: D DIF: 1 REF: 32-2
TOP: Open-economy macroeconomic model, Net capital outflow
MSC: Definitional
49. ANS: B DIF: 3 REF: 32-2
TOP: Open-economy macroeconomic model MSC: Analytical
50. ANS: D DIF: 2 REF: 32-3
TOP: Budget deficit, Open-economy macroeconomic model MSC: Analytical
51. ANS: C DIF: 2 REF: 32-3
TOP: Budget deficit, Market for loanable funds MSC: Analytical
52. ANS: A DIF: 2 REF: 32-3
TOP: Budget surplus, Market for loanable funds MSC: Analytical
53. ANS: C DIF: 2 REF: 32-3
TOP: Budget deficit, Open-economy macroeconomic model MSC: Analytical
54. ANS: B DIF: 2 REF: 32-3
TOP: Budget deficit, Open-economy macroeconomic model MSC: Analytical
55. ANS: C DIF: 2 REF: 32-3
TOP: Budget deficit, Open-economy macroeconomic model MSC: Analytical
56. ANS: A DIF: 2 REF: 32-3
TOP: Budget deficit, Open-economy macroeconomic model MSC: Applicative
57. ANS: C DIF: 1 REF: 32-3
TOP: Budget deficit, Open-economy macroeconomic model MSC: Applicative
58. ANS: B DIF: 2 REF: 32-3
TOP: Trade policy, Open-economy macroeconomic model MSC: Applicative
59. ANS: C DIF: 1 REF: 32-3
TOP: Trade policy, Open-economy macroeconomic model MSC: Applicative
60. ANS: A DIF: 2 REF: 32-3
TOP: Capital flight, Open-economy macroeconomic model MSC: Analytical
61. ANS: C DIF: 2 REF: 32-3
TOP: Capital flight, Open-economy macroeconomic model MSC: Definitional
62. ANS: C DIF: 3 REF: 32-3
TOP: Capital flight, Open-economy macroeconomic model MSC: Analytical
63. ANS: D DIF: 2 REF: 32-3
TOP: Capital flight, Open-economy macroeconomic model MSC: Analytical
64. ANS: B DIF: 3 REF: 32-3
TOP: Open-economy macroeconomic model MSC: Analytical
65. ANS: C DIF: 2 REF: 32-3
TOP: Open-economy macroeconomic model MSC: Analytical
66. ANS: A DIF: 2 REF: 32-3
TOP: Open-economy macroeconomic model MSC: Analytical
67. ANS: D DIF: 1 REF: 33-5 TOP: Short-run equilibrium
MSC: Analytical
68. ANS: A DIF: 2 REF: 33-5 TOP: Short-run equilibrium
MSC: Analytical
69. ANS: A DIF: 1 REF: 33-5 TOP: Short-run equilibrium, Optimism
MSC: Analytical
70. ANS: D DIF: 2 REF: 33-5 TOP: World War II
MSC: Definitional
71. ANS: D DIF: 1 REF: 33-5 TOP: Stagflation
MSC: Applicative
72. ANS: D DIF: 3 REF: 33-5
TOP: Short-run equilibrium, Net exports, Price expectations MSC: Analytical
73. ANS: A DIF: 3 REF: 33-5
TOP: Short-run equilibrium, Tax cuts, Oil prices MSC: Analytical
74. ANS: C DIF: 3 REF: 33-5
TOP: Short-run equilibrium, Government regulations, Exchange rate
MSC: Analytical
75. ANS: B DIF: 1 REF: 33-5 TOP: 1970s recessions
MSC: Definitional
76. ANS: D DIF: 1 REF: 33-1 TOP: Growth
MSC: Definitional
77. ANS: D DIF: 1 REF: 33-1 TOP: Business cycle
MSC: Definitional
78. ANS: A DIF: 1 REF: 33-1
TOP: Aggregate demand and supply model MSC: Interpretive
79. ANS: C DIF: 1 REF: 33-1 TOP: Real GDP
MSC: Definitional
80. ANS: D DIF: 1 REF: 33-2 TOP: Classical dichotomy
MSC: Definitional
81. ANS: C DIF: 2 REF: 33-2 TOP: Classical theory
MSC: Interpretive
82. ANS: C DIF: 2 REF: 33-2 TOP: Monetary neutrality, David Hume
MSC: Interpretive
83. ANS: D DIF: 1 REF: 33-2 TOP: Price level
MSC: Definitional
84. ANS: D DIF: 2 REF: 33-3 TOP: Interest-rate effect
MSC: Analytical
85. ANS: D DIF: 1 REF: 33-3 TOP: Aggregate demand
MSC: Definitional
86. ANS: B DIF: 2 REF: 33-3 TOP: Interest-rate effect
MSC: Analytical
87. ANS: D DIF: 2 REF: 33-3 TOP: Exchange-rate effect
MSC: Analytical
88. ANS: D DIF: 3 REF: 33-3 TOP: Exchange-rate effect
MSC: Analytical
89. ANS: D DIF: 1 REF: 33-3 TOP: Aggregate demand slope
MSC: Definitional
90. ANS: C DIF: 2 REF: 33-3 TOP: Interest-rate effect
MSC: Analytical
91. ANS: A DIF: 2 REF: 33-3 TOP: Interest-rate effect
MSC: Interpretive
92. ANS: C DIF: 2 REF: 33-3
TOP: Interest-rate effect, Exchange-rate effect MSC: Analytical
93. ANS: B DIF: 3 REF: 33-3
TOP: Exchange-rate effect, Interest-rate effect MSC: Analytical
94. ANS: A DIF: 1 REF: 33-3 TOP: Aggregate demand slope
MSC: Definitional
95. ANS: D DIF: 1 REF: 33-3 TOP: Aggregate demand
MSC: Definitional
96. ANS: A DIF: 1 REF: 33-3
TOP: Aggregate demand shifts, Housing prices MSC: Applicative
97. ANS: B DIF: 2 REF: 33-3
TOP: Aggregate demand shifts, Investment-tax credit MSC: Applicative
98. ANS: A DIF: 2 REF: 33-3
TOP: Aggregate demand shifts, Investment-tax credit MSC: Applicative
99. ANS: A DIF: 2 REF: 33-3
TOP: Aggregate demand shifts, Investment MSC: Applicative
100. ANS: B DIF: 2 REF: 33-3
TOP: Aggregate demand shifts, Investment MSC: Applicative
101. ANS: A DIF: 2 REF: 33-3 TOP: Aggregate demand shifts, Taxes
MSC: Applicative
102. ANS: A DIF: 2 REF: 33-3
TOP: Aggregate demand shifts, Money supply, Investment-tax credit
MSC: Applicative
103. ANS: D DIF: 2 REF: 33-3 TOP: Aggregate demand shifts
MSC: Applicative
104. ANS: B DIF: 2 REF: 33-3 TOP: Aggregate demand shifts
MSC: Applicative
105. ANS: B DIF: 2 REF: 33-3
TOP: Aggregate demand shifts, Consumption, Taxes MSC: Applicative
106. ANS: A DIF: 2 REF: 33-3
TOP: Aggregate demand shifts, Investment, Net exports MSC: Applicative
107. ANS: B DIF: 2 REF: 33-3
TOP: Aggregate demand shifts, Net exports MSC: Applicative
108. ANS: C DIF: 1 REF: 33-4 TOP: Long-run aggregate supply
MSC: Definitional
109. ANS: A DIF: 1 REF: 33-4 TOP: Growth
MSC: Definitional
110. ANS: D DIF: 1 REF: 33-4 TOP: Long-run aggregate supply
MSC: Definitional
111. ANS: D DIF: 2 REF: 33-4 TOP: Long-run aggregate supply shifts
MSC: Applicative
112. ANS: C DIF: 2 REF: 33-4
TOP: Long-run aggregate supply shifts, International trade, Natural resources
MSC: Applicative
113. ANS: B DIF: 2 REF: 33-4
TOP: Long-run aggregate supply shifts, Government regulations
MSC: Applicative
114. ANS: D DIF: 2 REF: 33-4 TOP: Long-run aggregate supply shifts
MSC: Analytical
115. ANS: C DIF: 2 REF: 33-4 TOP: Growth and inflation
MSC: Analytical
116. ANS: C DIF: 3 REF: 33-4
TOP: Long-run aggregate supply shifts, Inflation, Growth MSC: Applicative
117. ANS: A DIF: 2 REF: 33-4 TOP: Sticky-wage theory
MSC: Definitional
118. ANS: C DIF: 2 REF: 33-4 TOP: Sticky-price theory
MSC: Analytical
119. ANS: A DIF: 2 REF: 33-4 TOP: Misperceptions theory
MSC: Applicative
120. ANS: C DIF: 2 REF: 33-4 TOP: Short-run aggregate supply shifts
MSC: Applicative
SHORT ANSWER
121. ANS:
|a. |the tastes of consumers for domestic and foreign goods |
|b. |the prices of goods at home and abroad |
|c. |the exchange rates at which people can use domestic currency to buy foreign currencies |
|d. |the costs of importing goods from country to country |
|e. |the policies of the government toward international trade |
DIF: 2 REF: 31-1 TOP: Trade balance
MSC: Applicative
122. ANS:
The purchase of a foreign good by a U.S. resident is a U.S. import. Since net exports = exports - imports, net exports decrease. Bill pays for the software with U.S. dollars so that the Japanese have obtained more U.S. assets. Since, net capital outflow = the amount of foreign assets acquired by domestic residents - domestic assets acquired by foreign residents, the increase in foreign holdings of dollars by Japanese residents decreases U.S. net capital outflow.
DIF: 3 REF: 31-1 TOP: Net capital outflow, Net exports
MSC: Analytical
123. ANS:
Net exports were negative because the value of exports was low, and the colonies imported capital goods. If net exports were negative, net capital outflow must also have been negative. Net capital outflow would have been negative because the colonies sold stocks, bonds, and other domestic assets to buy capital goods from abroad.
DIF: 2 REF: 31-1 TOP: Net capital outflow, Net exports
MSC: Applicative
124. ANS:
Start from the national income accounting identity,
(1) Y = C + I + G + NX.
Recall from Chapter 25 that national saving is the income that is left after paying for current consumption and government expenditure,
(2) S = Y - C - G.
Rearranging, (1) we obtain Y - C - G = I + NX, and substituting in (2)
(3) S = I + NX.
Because net exports also equal net capital outflow, we can also write this equation as
(4) S = I + NCO.
DIF: 3 REF: 31-1 TOP: National income accounts
MSC: Analytical
125. ANS:
This is possible for an open economy. The remaining $40 billion is for net capital outflow in the form of purchases of foreign assets by U.S. residents. U.S. citizens can save by buying U.S. assets or by buying foreign assets.
DIF: 2 REF: 31-1 TOP: National savings
MSC: Applicative
126. ANS:
Real Exchange Rate = Nominal Exchange Rate x Domestic Price Index/Foreign Price Index
DIF: 2 REF: 31-2 TOP: Nominal exchange rate, Real exchange rate
MSC: Definitional
127. ANS:
The logic behind purchasing-power parity is the law of one price, which asserts that a good must sell for the same price in all locations. If the price for a good is higher in one market than in another, someone can make a profit by purchasing the good where it is relatively cheap, and selling the good where it is relatively expensive. This process of arbitrage leads to an equalization of prices for the good in all locations. If purchasing power parity holds the amount of dollars it takes to buy a good in the U.S. should buy enough foreign currency to buy the same good in a foreign country.
DIF: 2 REF: 31-3 TOP: Arbitrage, Purchasing-power parity
MSC: Analytical
128. ANS:
People can make a profit by buying gold in Australia and selling it in Russia. Purchases in Australia drive down the amount of gold a dollar can buy there. Sales in Russia drive up the amount of gold a dollar can buy there. Purchasing-power parity theory claims that this should continue until the dollar can buy the same amount of gold anywhere.
DIF: 2 REF: 31-3 TOP: Arbitrage, Purchasing-power parity
MSC: Analytical
129. ANS:
That it is equal to one. The number of dollars it takes to buy goods in the U.S.buys enough foreign currency to buy the same amount of goods in a foreign country.
DIF: 1 REF: 31-3 TOP: Purchasing-power parity, Real exchange rate
MSC: Definitional
130. ANS:
Higher money growth leads to higher prices, so prices will rise more in Turkey than in the United States. Under purchasing-power parity, this has no affect on the real exchange rate. However, in order for a dollar to buy as many goods in Turkey as it buys in the United States when prices are rising faster in Turkey, the nominal exchange rate must be rising so that a dollar buys more Turkish lira.
DIF: 2 REF: 31-3 TOP: Purchasing-power parity
MSC: Applicative
131. ANS:
|a. |The U.S. dollar real exchange rate depreciates. |
|b. |The U.S. dollar real exchange rate appreciates. |
|c. |The U.S. dollar real exchange rate depreciates. |
DIF: 2 REF: 31-3 TOP: Real exchange rate
MSC: Analytical
132. ANS:
According to purchasing-power parity, a dollar should buy the same amount of goods everywhere in the world. The inconsistency may exist because lobsters have to be transported to Paris. Price differences can also persist because goods are not perfect substitutes. While eating lobster gazing at the Maine coastline may be a pleasurable experience, eating well-prepared lobster in a fancy French restaurant may be an experience people would be willing to pay more for.
DIF: 2 REF: 31-3 TOP: Purchasing-power parity
MSC: Interpretive
133. ANS:
Higher U.S. interest rates make U.S. assets look more attractive than foreign assets. Investors in the United States and other countries are likely to move funds into the United States, reducing U.S. net capital outflow.
DIF: 2 REF: 32-1 TOP: Net capital outflow
MSC: Analytical
134. ANS:
|a. |the demand for loanable funds increases |
|b. |the demand for loanable funds increases |
|c. |the supply of loanable funds decreases |
|d. |the supply of loanable funds increases |
DIF: 2 REF: 32-1 TOP: Market for loanable funds
MSC: Analytical
135. ANS:
U.S. net capital outflow will increase. The increase in net capital outflow increases the U.S. demand for loanable funds, which increases U.S. interest rates.
DIF: 2 REF: 32-1 TOP: Net capital outflow
MSC: Applicative
136. ANS:
S is national saving, which is the source of loanable funds supply. NCO + I is net capital outflow plus domestic investment, which is the source of demand in the loanable funds market. NCO is the source of supply in the foreign-currency exchange market. NX is net exports, which is the source of demand in the foreign-currency exchange market.
DIF: 2 REF: 32-1
TOP: Saving in an open economy, Open-economy macroeconomic model
MSC: Interpretive
137. ANS:
The supply of loanable funds increases, and the equilibrium real interest rate falls. Because of the lower interest rate, U.S. net capital outflow rises. This increase makes the supply of dollars shift to the right, and the real exchange rate of the dollar depreciates.
DIF: 2 REF: 32-3 TOP: Open-economy macroeconomic model
MSC: Analytical
138. ANS:
Protectionist policies increase the demand for U.S. dollars, and so lead to an appreciation of the real exchange rate for U.S. dollars. However, the policies have no impact on either the supply of loanable funds or the demand for loanable funds, and so they have no effect on net capital outflow. Since net capital outflow must equal net exports, there is also no change in net exports. The appreciation of the dollar therefore leads to falling net exports which offsets the rise in net exports that protectionist policies would otherwise create.
DIF: 2 REF: 32-3 TOP: Trade policy, Open-economy macroeconomic model
MSC: Analytical
139. ANS:
| | | | |U.S. real | |
| | | |U.S. net |exchange rate | |
| |U.S. real |U.S. domestic |capital |of domestic |U.S. trade |
| |interest rate |investment |outflow |currency |balance |
|U.S. government |rises |falls |falls |appreciates |falls |
|budget deficit | | | | | |
|increases | | | | | |
|U.S. imposes |no change |no change |no change |appreciates |no change |
|import quotas | | | | | |
|capital flight |rises |falls |rises |depreciates |rises |
|from the United | | | | | |
|States | | | | | |
DIF: 3 REF: 32-3 TOP: Open-economy macroeconomic model
MSC: Analytical
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