Chapter 13 – Automatic Adjustments with Flexible and Fixed Exchange Rates
Multiple Choice
A depreciation of the US dollar makes US products __________________ for European residents, because European residents need _______ euros to purchase each dollar.
A)cheaper, more
B)cheaper, fewer
C)more expensive, more
D)more expensive, fewer
Answer: B pg. 336
When depreciation of the US dollar occurs compared to the euro, US residents will find European imports __________, because US residents need _________ dollars to purchase each euro.
A)more expensive, more
B)more expensive, fewer
C)less expensive, more
D)less expensive, fewer
Answer: A pg. 336
The price elasticity of the US demand for imports in euros is given by:
A)the percentage change in the quantity demanded of imports by US consumers divided by the percentage change in the quantity demanded of US exports by European consumers
B)the percentage change in the quantity demanded of imports by US consumers divided by the percentage change in the price of the US imports in euros
C)the percentage change in the quantity demanded of US exports by European consumers divided by the percentage change in the quantity demanded of imports by US consumers
D)the percentage change in the price of European exports divided by the percentage change in the price of the US imports in euros.
Answer: C pg. 337
The price elasticity of the ______________ in euros is given by the percentage change in the quantity demanded of US exports by foreigners divided by the percentage change in the price of US exports in euros.
A)US demand for exports
B)Foreign demand for US imports
C)US demand for imports
D)Foreign demand for US exports
Answer: D pg. 337
The price elasticity of the US demand for imports and the price elasticity of the foreign demand for US exports in euros have what type of relationship?
A)positive
B)negative
C)constant
D)there is no relationship
Answer: B pg. 337
If the US currency pass-through is 60 percent, what will occur as a result of a 15 percent depreciation in the value of the dollar?
A)import prices to fall by 9 percent
B)import prices to rise by 15 percent
C)export prices to fall by 9 percent
D)export prices to rise by 15 percent
Answer: B pg. 339
When demand is elastic, a(n) ___________ in price leads to a ___________ proportionate increase in the quantity demanded so that expenditures on the commodity increase.
A)increase, smaller
B)increase, larger
C)decrease, smaller
D)decrease, larger
Answer: B pg. 337
When demand is unitary elastic, a change in price will leave expenditures on the commodity___________.
A)unchanged
B)at a greater value
C)at a lower value
D)none of the above
Answer: A pg. 337
The US demand for euros is always___________.
A)negatively sloped
B)positively sloped
C)perfectly elastic
D)perfectly inelastic
Answer: A pg. 337
The US supply curve of euros can be either positively sloped, negatively sloped or vertical, depending on the elasticity of the ____________________
A)US supply curve of euros, foreign demand for European imports in terms of euros
B)US demand curve for euros, foreign demand for US exports in terms of euros
C)US demand curve for euros, foreign demand for European imports in terms of euros
D)US supply curve of euros, foreign demand for US exports in terms of euros
Answer: D pg. 337
The US supply curve may be vertical or negatively sloped if the foreign demand for US exports in terms of euros is sufficiently __________.
A)elastic
B)inelastic
C)unit elastic
D)none of the above
Answer: B pg. 337
When a(n) ___________________ condition is present, a disturbance from the equilibrium exchange rate gives rise to automatic forces that push the exchange rate back toward the equilibrium rate.
A)unstable foreign exchange market
B)Marshall-Lerner condition
C)J-curve effect
D)stable foreign exchange market
Answer: D pg. 338
When a(n) _____________condition is present, a disturbance from the equilibrium exchange rate pushes the exchange rate farther away from equilibrium.
A)unstable foreign exchange market
B)Marshall-Lerner condition
C)J-curve effect
D)stable foreign exchange market
Answer: A pg. 339
The foreign exchange market is stable (able to correct a trade deficit by a depreciation of the nation’s currency) if ____________________
A)the sum of the absolute values of price elasticities of the US demand for imports and the foreign demand for US exports is greater than one.
B)the sum of the absolute values of price elasticities of the US demand for imports and the foreign demand for US exports is less than one.
C)the sum of the absolute values of price elasticities of the US supply of exports and the foreign supply of imports is greater than one.
D)the sum of the absolute values of price elasticities of the US demand for imports and the foreign demand for US exports is greater than one.
Answer: A pg. 339
The foreign exchange market is stable if:
A)ηM+ ηX< 1
B)ηM+ ηX= 1
C)ηM+ ηX> 1
D)ηM+ ηX> 2
Answer: C pg. 339
The _______________states that the foreign exchange market is stable when the sum of the price elasticities of demands for imports and exports is greater than one.
A)J-curve effect
B)Pass-through condition
C)Marshall-Lerner condition
D)Stable market theory
Answer: C pg. 339
The ________________ explains why it may take up to two years for a currency depreciation to make significant reductions in a nation’s trade deficit.
A)J-curve effect
B)Pass-through
C)Marshall-Lerner condition
D)Multiplier effect
Answer: A pg. 339
The proportion of an exchange rate change that is reflected in export and import price changes is called:
A)J-curve effect
B)Pass-through
C)Marshall-Lerner condition
D)Unstable foreign exchange market
Answer: B pg. 339
For the US, the currency pass-through is about _______ percent
A)10
B)100
C)30
D)60
Answer: D pg. 339
The ________________ operated from about 1880 until the outbreak of World War I in 1914.
A)gold standard
B)silver standard
C)stable foreign exchange market
D)Marshall-Lerner condition
Answer: A pg. 341
Suppose a £1 gold coin in the UK contained 115 grains of pure gold, while a $1 gold coin in the US contained 25 grains. What is the mint parity exchange rate between pounds and dollars?
A)£4.87 per dollar
B)$4.87 per pound
C)$.22 per pound
D)£0.22 per dollar
Answer: B pg. 341
Which exchange system operated from the end of World War II to 1971?
A)The gold standard
B)The silver standard
C)The managed float
D)The Bretton Woods system
Answer: D pg. 341
_____________ represents the fixed exchange rates defined by the gold content of each nation’s currency.
A)Purchaing power parity
B)Pass through
C)Mint parity
D)Price-specie-flow
Answer: C pg. 342
The mint parity plus the cost of shipping an amount of gold equal to one unit of the foreign currency between the two nations is:
A)gold export point
B)gold import point
C)price-specie-flow mechanism
D)equilibrium level of income
Answer: A pg. 343
Assume ₣1 (French franc) gold coin in France contains 445.824 grains of pure gold, while the $1 gold coin in the US contains 23.22 grains. If the cost of shipping ₣1 from Paris to New York was 4 cents, the gold export point of the French franc is _____, and the gold import point is ________.
A)$103.56, $103.48
B)$19.24, $19.16
C)$19.16, $19.24
D)Cannot be determined from information given
Answer: B pg. 343
The ________________ served as the automatic adjustment mechanism under the gold standard exchange system.
A)mint parity
B)gold import point
C)price-specie-flow mechanism
D)purchasing power parity model
Answer: C pg. 343
In a closed economy without a government sector, the equilibrium level of income is found where income is equal to desired or planned consumption expenditures plus desired or planned business investment.
A)planned consumption expenditures divided by planned business investment
B)the ratio of planned business investment to planned consumption expenditures
C)planned consumption expenditures plus planned business investment plus planned net exports
D)planned consumption expenditures plus planned business investment.
Answer: D pg. 344
The equilibrium level of national income in the economy is where _______________.
A)the ratio of leakages to savings = the ratio of injection to consumption
B)leakages = injections
C)leakages + injections = consumption + investment
D)consumption – investment = zero
Answer: B pg. 346
The closed economy multiplier is equal to _____________.
A)The reciprocal of the marginal propensity to save
B)The reciprocal of the marginal propensity to consume
C)The slope of the savings function
D)The ratio of savings to investment
Answer: A pg. 346
If for every one dollar increase in income, savings increases by 25 cents, the marginal propensity toconsumeis _________ and the closed economy multiplier is ______.
A).25, 4
B).75, 4
C).25, .04
D).75, 1.333
Answer: B pg. 346
The increase in imports induced per dollar increase in income is called the________________.
A)import elasticity of demand
B)marginal propensity to import
C)income elasticity of imports
D)none of the above
Answer: B pg. 347
The equilibrium level of income in an open economy is where:
A)Savings + Investment = Imports + Exports
B)Consumption + Savings = Imports + Exports
C)Savings + Exports = Investment + Imports
D)Savings + imports = Investment + Exports
Answer: D pg. 347
The ratio of the change in income to the change in exports and/or investments is:
A)the multiplier
B)the foreign trade multiplier
C)equilibrium level of income
D)the marginal propensity to save
Answer: B pg. 348
___________ account(s) for the impact a change in a large nation’s income and trade has on the rest of the world and which the rest of the world in turn has on a nation.
A)Foreign repercussions
B)Absorption
C)The synthesis of automatic adjustments
D)The foreign multiplier
Answer: A pg. 352
Business cycles tend to impact nations other than the nation in which they are occurring because of ________________.
A)foreign repercussions
B)absorption
C)the income elasticity of imports
D)the foreign multiplier
Answer: A pg. 352
In a stable foreign exchange market, a nation can correct a deficit in its balance of payments by allowing its currency to __________.
A)appreciate
B)depreciate
C)remain constant
D)none of the above
Answer: B pg. 352
According to the J-curve effect, when a nation’s currency appreciates, the nation’s trade balance:
A)Will first move toward deficit, then toward surplus
B)Will first move toward surplus, then toward deficit
C)Will move toward deficit and remain there
D)Will move toward surplus and remain there
Answer: C pg. 339
The degree to which import and export prices are changed as a result of a change in the exchange rate is known as:
A)the J-curve effect
B)absorption
C)pass-through
D)the Marshall-Lerner condition
Answer: B pg. 353
The _____ effect explains that, after a depreciation of a nation’s currency, the trade balance will worsen for a period of time and then improve.
A)J-curve
B)absorption
C)pass-through
D)Marshall-Lerner
Answer: A pg. 339
True/False
True or False? When demand is unitary elastic, then a change in price will leave expenditures on the commodity at a greater value.
Answer: False pg. 337
True or False? The price elasticity of the US demand for imports in euros is represented by the symbol ηM.
Answer: True pg. 337
True or False? The US supply curve of euros may be vertical or negatively sloped if the foreign demand for US exports in terms of euros is sufficiently inelastic.
Answer: True pg. 337
True or False? For the US, the currency pass-through is about 10 percent.
Answer: False pg. 338
True or False? Under a fixed exchange rate system, trade deficits are not corrected by automatic changes in domestic prices.
Answer: False pg. 340
True or False? Under flexible exchange rates, a trade deficit is automatically corrected by a deprecation of the deficit nation’s currency.
Answer: True pg. 340
True or False? The gold standard was operated in the US until 1971.
Answer: False pg. 341
True or False? The price-specie-flow adjustment mechanism operates by the deficit nation losing gold and experiencing a reduction in its money supply.
Answer: True pg. 343
True or False? The marginal propensity to save is the amount of additional savings associated with each one-dollar increase in income multiplied by the increase in income.
Answer: True pg. 346
True or False? Withaa fixed exchange rate system, a nation cannot conduct effective monetary policy.
Answer: True pg. 344
Essay
How does the adjustment mechanism operate under a gold standard?
The adjustment mechanism is the price-specie-flow mechanism. This is the automatic adjustment mechanism under the gold standard. It operates by the deficit nation losing gold and experiencing a reduction in its money supply. This in turn reduces domestic prices, which stimulates the nation’s exports and discourages its imports until the deficit is eliminated. The money supply would fall in the deficit nation and rise in the surplus nation. As a result, the exports of the deficit nation would be encouraged and its imports would be discouraged until the deficit in its balance of payments was eliminated. The reduction in the deficit nation’s money supply would also increase interest rates in the nation, which induced a capital inflow that helped the nation finance its deficit. The opposite would occur in the surplus nation.
