Chapter 15 - Macroeconomics Theories and Policies, 10th Edition

MONETARY AND FISCAL POLICY IN THE OPEN ECONOMY 169 Multiple-Choice Questions: 1. An open-economy model is one that a. allows for trade among nations.* b. permits free flow of individuals among nations. c. encourages imports but not exports. d. advocates more exports than imports. e. Both a and b 2. Within a fixed exchange rate system, the effect of an expansionary fiscal policy action on the balance of payments will be to a. worsen the balance on the capital account but improve the trade balance. b. worsen the trade balance but improve the balance on the capital account. c. worsen both the trade balance and the balance on the capital account.* d. improve both the trade balance and the balance on the capital account. 3. A fall in the demand for U.S. exports would result in a rise in the exchange rate when a. there is no capital mobility and exchange rates are allowed to float. b. there is capital mobility. c. exchange rates are allowed to float.* d. the country has a balance of payments surplus. e. both c and d. 4. A reduction in national savings will a. increase foreign capital flows into the country. b. reduce domestic investment. c. reduce domestic interest rates. d. both a and b.* e. none of the above. 5. An exogenous increase in the country’s trade balance shifts the a. IS schedule to the left. b. IS schedule to the right.* c. LM schedule to the left. d. LM schedule to the right. 6. Which of the following statements is (are) correct? The Mundell-Fleming model is a. a new closed-economy model. b. implicitly assumes a fixed domestic price level. c. is an open-economy version of the IS-LM model. d. Both b and c* 7. Assuming imperfect perfect capital mobility, the BP schedule is a. vertical. b. horizontal. c. upward sloping.* d. downward sloping. e. flat. 8. According to the balance of payments schedule, as the level of income rises a. import demand increases while export demand does not.* b. export demand increases while import demand decreases. c. both import demand and export demand increase. d. both import demand and export demand decrease. 9. A rightward shift of the BP curve occurs with a a. fall in the exchange rate. b. cut in taxes. c. decrease in government spending. d. an increase in exports.* 10. Assuming perfect capital mobility and a fixed exchange rate, then an increase in government spending shifts a. the IS schedule only. b. both the IS and LM schedules to the left. c. both the IS and LM schedules to the right.* d. the LM schedule to the left and the IS schedule to the right. 11. The BP schedule shows the combinations of the interest rate and income a. that clear the goods market. b. that leads to equilibrium in the balance of payments. c. that equate supply and demand in the foreign exchange market at a given exchange rate.* d. and is always positively sloped. e. both b and d.* 12. Assume perfect capital mobility. Under a fixed exchange rate system, expansionary fiscal policy causes the value of the dollar to _____, while expansionary monetary policy causes the value of the dollar to _____. a. rise; rise b. fall; fall c. fall; rise d. rise; fall* 13. If exchange rates are perfectly flexible, an expansionary U.S. monetary policy will a. increase the supply of dollars in the foreign exchange market. b. shift the LM curve to the right. c. reduce the demand for dollars in the foreign exchange market. d. reduce the value of the dollar. e. all of the above.* 14. Which of the following statements is (are) correct? a. Given a fixed exchange rate system, there is an absence of conflicts between internal and external balance goals b. Under a fixed exchange rate system, potential conflicts arise between the goals of internal balance and external balance c. Countries may find that expansionary policies, which might be desired in order to reduce the unemployment rate, lead to income levels that are too high to balance the trade account and could lead to balance of payments problems d. Both a and c e. Both b and c* 15. A leftward shift of the BP schedule co the result of an a. exogenous rise in import demand. b. exogenous fall in export demand. c. increase in the foreign demand for capital. d. increase in the foreign interest rate. e. both a and b.* 16. In a closed economy, there should be a close positive relationship between a. budget deficits and interest rates. b. trade deficits and budget deficits. c. savings and investment. d. investment and consumption. e. Both a and c.* 17. Under perfect capital mobility and a floating exchange rate system, expansionary fiscal policy leads to a. an increase in income and the interest rate. b. no change in the interest rate and a fall in the trade balance.* c. no change in the interest rate and a decrease in income. d. an increase in interest rates and a fall in the trade balance. e. no change in interest rates and the exchange rate. 18. The BP schedule will be steeper the a. more responsive capital flows are to the interest rate. b. less responsive capital flows are to the interest rate.* c. smaller the marginal propensity to import. d. less likely an expansionary fiscal policy will lead to a balance of payments deficit. 19. In an open economy, there should be a a. close positive relationship between investment and savings. b. a close positive relationship between trade deficits and investment. c. a negative relationship between trade deficits and savings.* d. a positive relationship between a country’s savings rate and higher domestic interest rates. 20. Which of the following statements is (are) correct? According to the Feldstein-Horioka Saving Investment Puzzle a. countries with relatively low saving to income ratios have relatively high investment to income ratios. b. there is no correlation between investment and saving in developed countries. c. countries with a high ratio of saving to income have high ratios of investment to income.* d. Both a and b 21. Assuming perfect capital mobility and flexible exchange rates, then a. monetary policy is ineffective while fiscal policy is highly effective. b. fiscal policy is completely ineffective while monetary policy is highly effective.* c. both monetary policy and fiscal policy are effective. d. monetary policy is less effective than fiscal policy. 22. In the Mundell-Fleming model with perfect capital mobility, the domestic interest rates are determined by a. monetary policy. b. the IS and LM curves. c. domestic savings and investment. d. budget deficits. e. none of the above.* 23. In an economy with perfect capital mobility, if domestic interest rates are above world interest rates then a. capital outflows will drive domestic interest rates down. b. capital inflows will drive domestic interest rates down.* c. current account deficits will drive domestic interest rates down. d. the central bank will have to intervene even if exchange rates are floating. 24. Imports depend a. negatively on income. b. positively on income. c. negatively on the exchange rate. d. positively on the price of foreign currency. e. Both b and c.* 25. From the mid 1980s to the present, the United States a. had only a small current account deficit. b. had a large capital account deficit, which in the balance of payments accounts was financed with a surplus in the current account, which in turn financed investment in excess of domestic saving. c. has had a large current account deficit, which in the balance of payments accounts was financed with a surplus in the capital account, that in turn financed investment in excess of domestic saving.* d. None of the above 26. Assume perfect capital mobility and a fixed exchange rate system. Then, an increase in government spending would shift the a. LM schedule to the left. b. BP schedule to the right. c. BP schedule to the left. d. IS schedule to the right.* 27. A rightward shift of the BP schedule is the result of a(n) a. increase in the foreign interest rate. b. decrease in the foreign interest rate.* c. exogenous fall in export demand. d. increase in import demand. 28. Which of the following factors might make capital mobility less than perfect? a. Risks due to exchange rate changes b. Differential risk on the assets of different countries c. Technological progress, which improves the quality of information on foreign assets d. both a and b. e. All of the above* 29. Empirically, there is a close positive relationship between domestic savings and investment. This is consistent with what we should expect to observe in a. a closed economy.* b. the Mundell-Flemming model with perfect capital mobility. c. the Mundell-Flemming model with perfect capital mobility and flexible exchange rates. d. the Mundell-Flemming model with perfect capital mobility and fixed exchange rates. e. none of the above. 30. Under perfect capital mobility, an increase in world interest rates will a. increase income and reduce domestic interest rates. b. increase income.* c. increase income and lead to a balance of payment deficit. d. increase income and lead to a balance of payment surplus. 31. The balance of payments schedule can be expressed as a. X(Yƒ, ?) ? Z(Y, ?) ? F(r ? rƒ) = 0 b. X(Yƒ + ?) + Z(Y, ?) ? F(r ? rƒ) = 0 c. X(Yƒ, ?) ? Z(Y, ?) + F(r ? rƒ) = 0* d. X(Yƒ, ?) + Z(Y, ?) + F(r ? rƒ) = 0 32. Under perfect capital mobility a. there are no restrictions on buying financial assets, though there may be on buying factories and equipment. b. transactions costs have to be zero. c. differential risk in assets across countries are minimal.* d. All of the above e. None of the above 33. Under perfect capital mobility and flexible exchange rates, monetary policy works through the a. interest rate. b. exchange rate.* c. exports. d. Both b and c e. None of the above 34. An exogenous increase in domestic investment will a. increase foreign capital flows into the country.* b. increase domestic capital flows to foreign countries. c. reduce domestic interest rates. d. both a and b. e. none of the above. 35. In the Mundell-Fleming model, regardless of whether the economy has perfect capital mobility or not, an increase in the money supply a. reduces interest rates . b. increases income.* c. decreases the trade balance. d. increases capital inflows. 36. In the Mundell-Fleming model, the exogenous variables are a. government spending, taxes, and income. b. the exchange rate and the price level. c. the price level, the world interest rate, monetary policy, and fiscal policy.* d. the world interest rate, the price level, and the exchange rate. e. none of the above. 37. Assuming imperfect capital mobility and a fixed exchange rate, then an expansionary monetary policy a. results in a balance of payments surplus without a conflict between domestic goals and external balance. b. results in a balance of payments deficit with a potential conflict between domestic goals and external balance.* c. will shift the LM curve to the left. d. will have no effect on the balance of payments. 38. Assume perfect capital mobility. Under a fixed exchange rate system, expansionary fiscal policy causes income to _____, while under flexible exchange rates expansionary fiscal policy causes income to _____. a. increase; increase b. increase; remain unchanged* c. increase; decrease d. remain unchanged; increase 39. The net capital inflow is a. positively related to the domestic interest rate minus the foreign interest rate.* b. negatively related to the domestic interest rate minus the foreign interest rate. c. positively related to the exchange rate. d. negatively related to the exchange rate. e. both a and c. 40. A depreciation of the dollar under perfect capital mobility would cause a. the LM curve to shift to the left.* b. the LM curve to shift to the right. c. the IS curve to shift to the right. d. the IS curve to shift to the left. e. the BP curve to shift up. 41. In the Mundell-Fleming model, all of the following are true EXCEPT: a. the intersection of the IS and LM curves determine the equilibrium exchange rate.* b. the BP curves position is determined by the exchange rate. c. the policy choice between fixed and floating exchange rates shifts the BP curve. d. the extent of capital mobility determines the slope of the BP curve. e. all of the above are true. 42. In the Mundell-Fleming model with a floating exchange rate and perfect capital mobility, an increase in the money supply does all of the following EXCEPT: a. increase interest rates.* b. increase income. c. increase the IS curve. d. increase inflation. 43. In the Mundell-Fleming model with a floating exchange rate and perfect capital mobility, expansionary fiscal policy does all of the following EXCEPT: a. increase interest rates.* b. increase income. c. increase the IS curve. d. increase inflation. 44. Dollarization by a foreign country is another form of: a. balancing a country’s current account. b. maintaining monetary policy independence. c. fixing an exchange rate.* d. maintaining a balanced government budget. 45. Under perfect capital mobility, fiscal policy has the largest impact on the income under: a. fixed exchange rates.* b. floating exchange rates. c. dollarization. d. a currency union. 46. Under perfect capital mobility, monetary policy has the largest impact on the income under: a. floating exchange rates.* b. fixed exchange rates. c. dollarization. d. a currency union. 47. Which of the following factors would increase capital mobility? a. fixed exchange rates.* b. differences in tax laws between countries. c. different accounting standards between countries. d. both a and b. e. All of the above. 48. The BP curve shifts to the left when: a. the exchange rate falls.* b. interest rates rise. c. income rises. d. imports increase. 49. Assuming perfect perfect capital mobility, the BP schedule is a. vertical. b. horizontal.* c. upward sloping. d. downward sloping. e. flat. 50. In an open economy, there should be a close positive relationship between a. budget deficits and interest rates. b. trade deficits and budget deficits. c. savings and investment. d. investment and consumption. e. none of the above.*