Deck 17: Macroeconomic Policy and Floating Exchange Rates

Question 1

All of the following are tools of macroeconomic policy except:

A) government spending.
B) taxes.
C) the government's budget deficit
D) the government's budget surplus.
E) the government's tariff policy.

Answer 1

the government's tariff policy.

Question 2

Government spending and taxes are examples of a government's:

A) fiscal policy.
B) foreign policy.
C) monetary policy.
D) trade policy.
E) industrial policy.

Answer 2

fiscal policy.

Question 3

The balance between inflows and outflows in the current account is known as:

A) internal balance.
B) external balance.
C) macroeconomic balance.
D) the Phillips curve.
E) the J-curve

Answer 3

external balance.

Question 4

The levels of inflation and unemployment that fit the preferences of a country's citizens is known as:

A) microeconomic balance.
B) full employment balance.
C) the natural rate of unemployment.
D) external balance
E) internal balance.

Question 5

Fiscal policy refers to government changing:

A) its spending.
B) interest rates.
C) the money supply.
D) its quotas.
E) None of the above

Question 6

Government spending on goods and services is typically _____ percent of GDP.

A) 5
B) 15
C) 30
D) 40
E) 57

Question 7

The demand for loanable funds is:

A) directly related to the price level.
B) indirectly related to the price level.
C) directly related to interest rates.
D) indirectly related to interest rates.
E) unrelated to interest rates

Question 8

The supply of loanable funds:

A) represents the money supply.
B) represents the total amount of money available to be borrowed.
C) represents the total amount of loans in the economy.
D) represents the exchange rate.
E) does not influence interest rates.

Question 9

Monetary policy entails:

A) controlling the rate of growth of the money supply.
B) tax policy.
C) government spending.
D) following established rules concerning interest rates.
E) changing taxes.

Question 10

Changes in a country's money supply and interest rates are called:

A) fiscal policy.
B) exchange rate policy.
C) monetary policy.
D) commercial policy.
E) industrial policy.

Question 11

11 Expansionary fiscal policy usually involves some combination of ____ taxes and/or _____ government spending on goods and services.

A) lower, lower
B) lower, higher
C) higher, higher
D) higher, lower
E) higher, unchanged

Question 12

12 A government budget deficit would tend to:

A) increase the demand for loanable funds.
B) decrease the demand for loanable funds.
C) increase the supply of loanable funds.
D) lower interest rates.
E) have no effect on interest rates.

Question 13

13 A government budget deficit would tend to:

A) lead to lower interest rates.
B) lead to higher interest rates.
C) reduce the supply of loanable funds.
D) cause a depreciation of the currency.
E) have no effect on interest rates.

Question 14

When the government employs a combination of higher spending and lower taxes, this type of policy is called an:

A) expansionary exchange rate policy.
B) expansionary trade policy.
C) expansionary monetary policy.
D) expansionary fiscal policy.
E) confused policy.

Question 15

The conflicting effects of an expansionary fiscal policy are that:

A) it increases aggregate demand and improves the current account.
B) it reduces aggregate demand and the exchange rate depreciates.
C) it increases aggregate demand and the exchange rate depreciates resulting in a decrease in aggregate demand.
D) it increases aggregate demand and the exchange rate appreciates resulting in a decrease in aggregate demand.
E) it lowers aggregate demand and lowers interest rates.

Question 16

As a government adopts an expansionary fiscal policy:

A) the demand for loanable funds increases causing interest rates to rise.
B) the demand for loanable funds decreases causing interest rates to fall.
C) the supply of loanable funds increases causing interest rates to rise.
D) the supply of loanable funds decreases causing interest rates to fall.
E) the demand for loanable funds does not change.

Question 17

In a closed economy, expansionary fiscal policy causes:

A) interest rates to rise and aggregate demand to increase.
B) interest rates to fall and aggregate demand to decrease.
C) interest rates to rise and aggregate demand to decrease.
D) interest rates to fall and aggregate demand to increase.
E) no change in interest rates.

Question 18

In an open economy, expansionary fiscal policy causes:

A) interest rates to rise and an inflow of foreign capital.
B) interest rates to fall and an inflow of foreign capital.
C) interest rates to rise and an outflow of foreign capital.
D) interest rates to fall and an outflow of foreign capital.
E) no change in interest rates and an inflow of foreign capital.

Question 19

In a closed economy, an expansionary fiscal policy:

A) leads to an increase in both domestic output and the price level.
B) leads to a decrease in both domestic output and the price level.
C) leads to an increase in domestic output and a decrease in the price level.
D) leads to a decrease in domestic output and an increase in the price level.
E) has no effect on private investment.

Question 20

In an open economy, an expansionary fiscal policy:

A) is very effective in changing real GDP.
B) is not effective in changing real GDP.
C) is not effective in changing the exchange rate.
D) is not effective in changing capital flows between countries.
E) greatly increases the price level.

Question 21

In an open economy, contractionary fiscal policy causes:

A) interest rates to rise and inflows of foreign capital.
B) interest rates to fall and inflows of foreign capital.
C) interest rates to rise and outflows of foreign capital.
D) interest rates to fall and outflows of foreign capital.
E) no change in interest rates and outflows of foreign capital.

Question 22

An expansionary fiscal policy:

A) puts upward pressure on interest rates causing the currency to appreciate.
B) puts upward pressure on interest rates causing the currency to depreciate.
C) puts downward pressure on interest rates causing the currency to appreciate.
D) puts downward pressure on interest rates causing the currency to depreciate.
E) does not change interest rates but causes the currency to depreciate.

Question 23

As a government adopts an expansionary fiscal policy:

A) the demand for loanable funds increases causing interest rates to rise.
B) the demand for loanable funds decreases causing interest rates to fall.
C) the supply of loanable funds increases causing interest rates to rise.
D) the supply of loanable funds decreases causing interest rates to fall.
E) does not change the demand for loanable funds.

Question 24

Which of the following statements is true?

A) An expansionary fiscal policy will tend to lower interest rates.
B) Lower interest rates lead to capital outflows.
C) Higher interest rates cause a depreciation of the currency.
D) Higher interest rates can lead to a current account surplus.
E) Interest rates do not affect capital flows.

Question 25

Which of the following statements is true with respect to contractionary fiscal policy?

A) A contractionary fiscal policy leads to lower interest rates.
B) Lower interest rates lead to capital inflows.
C) Capital inflows lead to a depreciation of the currency.
D) A contractionary fiscal policy is the cause of current account deficits.
E) Capital flows do not affect the current account.

Question 26

Which of the following is true with respect to contractionary fiscal policy?

A) the currency tends to depreciate
B) the demand for loanable funds tends to increase
C) the current account tends to become more negative
D) the current account does not change
E) interest rates tend to fall

Question 27

When the government employs a combination of higher taxes and lower spending, this type of policy is called a:

A) contractionary fiscal policy.
B) contractionary trade policy.
C) contractionary monetary policy.
D) contractionary exchange rate policy.
E) an inflationary policy

Question 28

A contractionary fiscal policy:

A) lowers the federal budget deficit and increases domestic interest rates.
B) increases the federal budget deficit and increases domestic interest rates.
C) lowers the federal budget deficit and decreases domestic interest rates.
D) increases the federal budget deficit and decreases domestic interest rates.
E) does not change interest rates.

Question 29

A contractionary fiscal policy:

A) puts upward pressure on interest rates causing the domestic currency to appreciate.
B) puts upward pressure on interest rates causing the domestic currency to depreciate.
C) puts downward pressure on interest rates causing the domestic currency to appreciate.
D) puts downward pressure on interest rates causing the domestic currency to depreciate.
E) None of the above

Question 30

As a government adopts a contractionary fiscal policy:

A) the demand for loanable funds increases causing interest rates to rise.
B) the demand for loanable funds decreases causing interest rates to fall.
C) the supply of loanable funds increases causing interest rates to rise.
D) the supply of loanable funds decreases causing interest rates to fall.
E) interest rates do not change.

Question 31

In a closed economy, contractionary fiscal policy causes:

A) interest rates to rise and aggregate demand to increase.
B) interest rates to fall and aggregate demand to decrease.
C) interest rates to rise and aggregate demand to decrease.
D) interest rates to fall and aggregate demand to increase.
E) interest rates to rise and aggregate demand does not change.

Question 32

In a closed economy, a contractionary fiscal policy:

A) leads to an increase in both real GDP and the price level.
B) leads to a decrease in both real GDP and the price level.
C) leads to an increase in real GDP and a decrease in the price level.
D) leads to a decrease in real GDP and an increase in the price level.
E) does not change either real GDP or the price level.

Question 33

In an open economy, a contractionary fiscal policy:

A) is very effective in changing real GDP.
B) is not effective in changing real GDP.
C) is not effective in changing the exchange rate.
D) is not effective in changing capital flows between countries.
E) leaves interest rates unchanged.

Question 34

Which of the following is usually associated with an expansionary monetary policy?

A) lower interest rates
B) higher interest rates
C) a current account deficit
D) lower aggregate demand
E) a shift of aggregate supply

Question 35

Expansionary monetary policy in the U.S. is determined by:

A) the U.S. Treasury.
B) the U.S. Congress.
C) the President.
D) the Federal Reserve.
E) the IMF.

Question 36

Which of the following is not associated with an expansionary monetary policy?

A) a depreciating currency
B) a current account deficit
C) a current account surplus
D) higher interest rates
E) a lower price level

Question 37

Which of the following statements is true?

A) An expansionary monetary policy tends to raise interest rates.
B) An expansionary monetary policy tends to lead to an appreciation of the currency.
C) An expansionary monetary policy tends to lead to a current account deficit.
D) A contractionary monetary policy tends to lead to a depreciation of the currency.
E) An expansionary monetary policy tends to lead to an increase in aggregate demand.

Question 38

In a closed economy, an expansionary monetary policy causes:

A) interest rates to rise and aggregate demand to increase.
B) interest rates to fall and aggregate demand to decrease.
C) interest rates to rise and aggregate demand to decrease.
D) interest rates to fall and aggregate demand to increase.
E) no change in interest rates or aggregate demand.

Question 39

In an open economy, an expansionary monetary policy causes:

A) interest rates to rise and inflows of foreign capital.
B) interest rates to fall and inflows of foreign capital.
C) interest rates to rise and outflows of foreign capital.
D) interest rates to fall and outflows of foreign capital.
E) None of the above

Question 40

In a closed economy, an expansionary monetary policy:

A) leads to an increase in both real GDP and the price level.
B) leads to a decrease in both real GDP and the price level.
C) leads to an increase in real GDP and a decrease in the price level.
D) leads to a decrease in real GDP and an increase in the price level.
E) leads to a decrease in real GDP and no change in the price level.

Question 41

In an open economy, an expansionary monetary policy:

A) is very effective in changing real GDP.
B) is not effective in changing real GDP.
C) is not effective in changing the exchange rate.
D) is not effective in changing capital flows between countries.
E) has no effect on interest rates.

Question 42

An expansionary monetary policy:

A) puts upward pressure on interest rates causing the currency to appreciate.
B) puts upward pressure on interest rates causing the currency to depreciate.
C) puts downward pressure on interest rates causing the currency to appreciate.
D) puts no pressure on interest rates and does not change the exchange rate.
E) puts downward pressure on interest rates causing the currency to depreciate.

Question 43

Everything else equal, which government policy would cause a country's currency to depreciate?

A) expansionary monetary policy
B) contractionary monetary policy
C) expansionary fiscal policy
D) contractionary exchange rate policy
E) a combination of higher taxes and lower spending.

Question 44

A contractionary monetary policy:

A) puts upward pressure on interest rates causing the currency to appreciate.
B) puts upward pressure on interest rates causing the currency to depreciate.
C) puts downward pressure on interest rates causing the currency to appreciate.
D) puts downward pressure on interest rates causing the currency to depreciate.
E) None of the above

Question 45

As government adopts a contractionary monetary policy:

A) the demand for loanable funds increases causing interest rates to rise.
B) the demand for loanable funds decreases causing interest rates to fall.
C) the supply of loanable funds increases causing interest rates to fall.
D) the supply of loanable funds does not change and interest rates rise.
E) the supply of loanable funds decreases causing interest rates to rise.

Question 46

In a closed economy, a contractionary monetary policy causes:

A) interest rates to rise and aggregate demand to increase.
B) interest rates to fall and aggregate demand to decrease.
C) interest rates to rise and aggregate demand to decrease.
D) interest rates to fall and aggregate demand to increase.
E) interest rates to fall and aggregate demand to be unchanged.

Question 47

In an open economy, a contractionary monetary policy causes:

A) interest rates to rise and inflows of foreign capital.
B) interest rates to fall and inflows of foreign capital.
C) interest rates to rise and outflows of foreign capital.
D) interest rates to fall and outflows of foreign capital.
E) interest rates to fall and aggregate demand to be unchanged.

Question 48

In a closed economy, a contractionary monetary policy:

A) leads to an increase in both real GDP and the price level.
B) leads to a decrease in both real GDP and the price level.
C) leads to an increase in real GDP and a decrease in the price level.
D) leads to a decrease in real GDP and an increase in the price level.
E) leads to no change in real GDP or the price level.

Question 49

In an open economy, a contractionary monetary policy:

A) is very effective in changing real GDP.
B) is not effective in changing real GDP.
C) is not effective in changing the exchange rate.
D) is not effective in changing capital flows between countries.
E) causes capital outflows.

Question 50

Suppose that a country has a current account deficit and a problem with inflation. A consistent policy mix in this case would be a(n) _____ fiscal policy coupled with a(n) _____ monetary policy.

A) expansionary, expansionary
B) expansionary, contractionary
C) contractionary, constant
D) contractionary, contractionary
E) constant, contractionary

Question 51

Which of the following terms describes the tendency for larger government borrowing to increase interest rates?

A) expansionary monetary policy
B) contractionary fiscal policy
C) industrial policy
D) crowding out
E) crowding in

Question 52

Fiscal and monetary policy have predictable effects on all of the following except:

A) the exchange rate.
B) the current account.
C) capital flows.
D) the level of output.
E) the balance on services

Question 53

The effect of a depreciation of the domestic currency on the trade balance is likely to:

A) have little or not effect.
B) increase it in the short run and decrease it in the long run.
C) decrease it in the short and long runs.
D) decrease it in the short run and increase it in the long run.
E) not be consistent.

Question 54

The "J curve":

A) only occurs under fixed exchange rates.
B) occurs only when a currency is appreciating.
C) represents an initial worsening of the trade balance with devaluation.
D) never occurs in developing countries.
E) only occurs in developing countries.

Question 55

Fiscal policy involves the use of tax and spending policies by the government to influence the level of aggregate demand.

Question 56

Monetary and fiscal policy are usually focused on internal balance because inflation and unemployment are less important than the current account balance.

Question 57

External balance refers to the government achieving levels of unemployment and inflation that fit the preferences of the citizens of the country.

Question 58

External balance refers to the government balancing the inflows and outflows included in the current account.

Question 59

External balance is usually considered to be more important to a country than internal balance.

Question 60

Government spending on goods and services is typically 45 percent of GDP.

Question 61

Fiscal policy refers to the government's ability to change spending and taxation to affect the level of economic activity.

Question 62

Monetary policy refers to the use of changes in the level of government debt and interest rates to affect a country's level of economic activity.

Question 63

An expansionary fiscal policy usually leads to a government budget deficit or a higher deficit if one already existed.

Question 64

A higher government budget deficit will lead to increased government borrowing if the government chooses not to cover the deficit by printing money.

Question 65

The demand for loanable funds is directly related to the interest rate.

Question 66

The demand for loanable funds is composed of private sector demand and foreign sector demand.

Question 67

The demand for loanable funds is composed of both public and private sector demands for funds to borrow.

Question 68

In the short run, the supply of loanable funds is determined by the amount of money the public wishes to save.

Question 69

The supply of loanable funds is directly related to interest rates.

Question 70

A larger government budget deficit leads to higher interest rates and an inflow of capital.

Question 71

With flexible exchange rates, an expansionary fiscal policy will increase output and income.

Question 72

An expansionary fiscal policy in an open economy with freely mobile capital and flexible exchange rates is more effective in changing equilibrium output than in a closed economy.

Question 73

An expansionary fiscal policy may not have a pronounced effect on aggregate demand with floating exchange rates.

Question 74

When exchange rates are flexible, expansionary fiscal policy indirectly leads to a capital inflow and a current account surplus.

Question 75

An expansionary fiscal policy leads to an appreciation of the country's currency.

Question 76

In an open economy with flexible exchange rates, expansionary fiscal policy is highly effective in changing real GDP.

Question 77

A contractionary fiscal policy entails some combination of lower taxes and/or lower government spending on goods and services.

Question 78

A contractionary fiscal policy will tend to reduce the demand for loanable funds and drive up interest rates.

Question 79

A contractionary fiscal policy usually causes an appreciation of the country's currency.

Question 80

A contractionary fiscal policy generally results in a capital inflow and a current account deficit.