quizbee

Question 1

used to achieve full employment with price stability and equilibrium in the balance of payments.

Answer 1

• Adjustment policies

Question 2

The economist most responsible for shifting the emphasis from automatic adjustment mechanisms to adjustment policies was WHO

Answer 2

James Meade

Question 3

• The most important economic goals or objectives of nations are

Answer 3

(1) internal balance,
(2) external balance,
(3) a reasonable rate of growth,
(4) an equitable distribution of
income, and
(5) adequate protection of the environment

Question 4

refers to full employment or a rate of unemployment of no more than, say, 4–5 percent per year (the so-called frictional unemployment arising in the process of changing jobs) and a rate of inflation of no more than 2 or 3 percent per year

Answer 4

• Internal balance

Question 5

• Internal balance refers to full employment or a rate of unemployment of no more than, say, HOW MANY percent per year (the so-called frictional unemployment arising in the process of changing jobs) and a rate of inflation of no more than HOW MANY percent per year.

Answer 5

4–5 percent
2 or 3 percent per year

Question 6

to equilibrium in the balance of payments (or a desired temporary disequilibrium such as a surplus that a nation may want in order to replenish its depleted international reserves).

Answer 6

• External balance refers

Question 7

• nations have the following policy instruments at their disposal:

Answer 7

(1) expenditure-changing, or demand, policies,
(2) expenditure-switching policies, and
(3) direct controls.

Question 8

include both fiscal and monetary policies.

Answer 8

• Expenditure-changing policies

Question 9

refers to changes in government expenditures, taxes, or both

Answer 9

• Fiscal policy

Question 10

if government expenditures are increased and/or taxes reduced.

These actions lead to an expansion of domestic production and income through a multiplier process (just as in the case of an increase in domestic investment or exports) and induce a rise in imports (depending on the marginal propensity to import of the nation).

Answer 10

expansionary Fiscal policy

Question 11

refers to a reduction in government expenditures and/or an increase in taxes, both of which reduce domestic production and income and induce a fall in imports.

Answer 11

• Contractionary fiscal policy

Question 12

I + X + G + S + M + T
or

Answer 12

(G − T) = (S − I) + (M − X)

Question 13

involves a change in the nation’s money supply that affects domestic interest rates.

Answer 13

• Monetary policy

Question 14

if the money supply is increased and interest rates fall.

This induces an increase in the level of investment and income in the nation (through the multiplier process) and induces imports to rise. At the same time, the reduction in the interest rate induces a short-term capital outflow or reduced inflow.

Answer 14

Monetary policy is easy

Question 15

refers to a reduction in the nation’s money supply and a rise in the interest rate. This discourages investment, income, and imports, and also leads to a short-term capital inflow or reduced outflow.

Answer 15

• tight monetary policy

Question 16

refer to changes in the exchange rate (i.e., a devaluation or revaluation).

Answer 16

• Expenditure-switching policies

Question 17

switches expenditures from foreign to domestic commodities and can be used to correct a deficit in the nation’s balance of payments.

But it also increases domestic production, and this induces a rise in imports which neutralizes a part of the original improvement in the trade balance.

Answer 17

• devaluation

Question 18

switches expenditures from domestic to foreign products and can be used to correct a surplus in the nation’s balance of payments.

This also reduces domestic production and, consequently, induces a decline in imports, which neutralizes part of the effect of the revaluation.

Answer 18

• revaluation

Question 19

consist of tariffs, quotas, and other restrictions on the flow of international trade and capital.

These are also expenditure-switching policies, but they can be aimed at specific balance-of-payments items (as opposed to a devaluation or revaluation, which is a general policy and applies to all items at the same time).

Answer 19

• Direct controls

Question 20

in the form of price and wage controls can also be used to stem domestic inflation when other policies fail.

Answer 20

Direct controls

Question 21

• According to WHO (Nobel prize winner in economics in 1969), the nation usually needs as many effective policy instruments as the number of independent objectives it has. If the nation has two objectives, it usually needs two policy instruments to achieve the two objectives completely; if it has three objectives, it requires three instruments, and so on.

Answer 21

Tinbergen

Question 22

Since each policy affects both the internal and external balance of the nation, it is crucial that each policy be paired with and used for the objective toward which it is most effective, according to the

Answer 22

principle of effective market classification developed by Mundell.

Question 23

in honor of Trevor Swan, the Australian economist who introduced it.

Answer 23

• Swan diagram

Question 24

• Swan diagram in honor of WHO, the Australian economist who introduced it.

Answer 24

Trevor Swan

Question 25

as a sign of weakness and feared it might lead to destabilizing international capital movements.

Answer 25

* devaluation

Question 26

to show how a nation can use fiscal and monetary policies to achieve both internal and external balance without any change in the exchange rate.

Answer 26

* Mundell–Fleming model

Question 27

shows the various combinations of interest rates (i) and national income (Y) that result in equilibrium in the goods market.

Answer 27

* IS curve

Question 28

showing all points at which the goods market is in equilibrium.

Answer 28

* IS curve,

Question 29

shows the various combinations of interest rates (i) and national income (Y) at which the demand for money is equal to the given and fixed supply of money, so that the money market is in equilibrium.

Answer 29

* LM curve

Question 30

, showing equilibrium in the money market.

Answer 30

* LM curve

Question 31

showing equilibrium in the balance of payments.

Answer 31

* BP curve,

Question 32

shows the various combinations of interest rates (i) and national income (Y) at which the nation’s balance of payments is in equilibrium at a given exchange rate. The balance of payments is in equilibrium when a trade deficit is matched by an equal net capital inflow, a trade surplus is matched by an equal net capital outflow, or a zero trade balance is associated with a zero net international capital flow.

Answer 32

BP curve

Question 33

consists of the active working balances held for the purpose of making business payments as they become due. The transaction demand for money is positively related to the level of national income.

Answer 33

* transaction demand for money

Question 34

arises from the desire to hold money balances instead of interest-bearing securities.

Answer 34

* Speculative demand for money

Question 35

in the form of an increase in government expenditures and/or a reduction in taxes (which increases private consumption) shifts the IS curve to the right so that at each rate of interest, the goods market is in equilibrium at a higher level of national.

Answer 35

* An expansionary fiscal policy

Question 36

shifts the IS curve to the left.

Answer 36

* contractionary fiscal policy

Question 37

in the form of an increase in the nation’s money supply shifts the LM curve to the right, indicating that at each rate of interest, the level of national income must be higher to absorb the increase in the money supply.

Answer 37

* easy monetary policy

Question 38

reduces the nation’s money supply and shifts the LM curve to the left.

Answer 38

* a tight monetary policy

Question 39

T OR F * Monetary and fiscal policies will directly affect the BP curve, and since we are here assuming that the exchange rate is fixed, the BP curve remains unchanged (i.e., it does not shift).

Answer 39

F * Monetary and fiscal policies will not directly affect the BP curve, and since we are here assuming that the exchange rate is fixed, the BP curve remains unchanged (i.e., it does not shift).

Question 40

had the largest budget deficit (12.8 percent of GDP) in 2009 and the largest current account deficit (5.8 percent of GDP) in 2006.

Answer 40

* The United States

Question 41

WHAT, which would reduce the nation’s money supply to the original level and shift the LM′ curve back to the original LM position.

Answer 41

capital outflows

Question 42

in the figure shows the various combinations of fiscal and monetary policies that result in internal balance (i.e., full employment with price stability) in the nation.

Answer 42

* IB line

Question 43

t or f The IB line is positively inclined because an expansionary fiscal policy must be balanced by a tight monetary policy of a sufficient intensity to maintain internal balance.

Answer 43

t

Question 44

shows the various combinations of fiscal and monetary policies that result in external balance (i.e., equilibrium in the nation’s balance of payments).

Answer 44

* EB line

Question 45

raises national income and increases the transaction demand for money in the nation.

Answer 45

* Expansionary fiscal policy

Question 46

operates by changing the money supply and the nation’s interest rate.

Answer 46

* monetary policy

Question 47

is more effective than fiscal policy in achieving external balance, and so the EB line is flatter than the IB line

Answer 47

* monetary policy

Question 48

monetary policy should be assigned to achieve external balance and fiscal policy to achieve internal balance.

Answer 48

* principle of effective market classification,

Question 49

t or f * According to some economists, the use of monetary policy merely allows the nation to finance its deficit in the short run, unless the deficit nation continues to tighten its monetary policy over time.

Answer 49

t

Question 50

is conducted by one branch of the government,

Answer 50

* Fiscal policy

Question 51

is determined by the semiautonomous Federal Reserve Board.

Answer 51

* monetary policy

Question 52

* The controversial inverse relationship, or trade-off, between the rate of unemployment and the rate of inflation is summarized by the WHAT

Answer 52

Phillips curve.

Question 53

* Direct controls to affect the nation’s balance of payments can be subdivided into WHAT AND WHAT

Answer 53

trade controls and financial or exchange controls.

Question 54

(such as tariffs, quotas, and other quantitative restrictions on the flow of international trade),

Answer 54

* trade controls

Question 55

(such as restrictions on international capital flows and multiple exchange rates),

Answer 55

* financial or exchange controls

Question 56

One of the most important trade or commercial controls

Answer 56

* Import tariff

Question 57

This increases the price of imported goods to domestic consumers and stimulates the domestic production of import substitutes

Answer 57

* Import tariff

Question 58

make domestic goods cheaper to foreigners and encourage the nation’s exports.

Answer 58

* export subsidies

Question 59

Most developing nations, on the other hand, have some type of exchange controls. The most common is WHAT, with higher exchange rates on luxury and nonessential imports and lower rates on essential imports.

Answer 59

multiple exchange rates