Question 1

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.

Accepted Answer

In an open economy, an expansionary monetary policy can effectively change real GDP by lowering interest rates, which stimulates investment and consumption, and can also affect the exchange rate, making exports more competitive.

Question 2

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.

Accepted Answer

An expansionary monetary policy typically involves the central bank increasing the money supply, which leads to lower interest rates. Lower interest rates make a country's financial assets less attractive to foreign investors, leading to a depreciation of the currency as demand for it decreases.

Question 3

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.

Accepted Answer

Expansionary monetary policy, which involves increasing the money supply, typically leads to a depreciation of the country's currency. This is because an increase in money supply can lead to lower interest rates, which reduces foreign investment in the country's assets, decreasing demand for the currency and thus causing it to depreciate.

Question 4

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

Accepted Answer

A contractionary monetary policy typically involves reducing the money supply or raising interest rates, which makes borrowing more expensive. This tends to attract foreign investors seeking higher returns, leading to an appreciation of the domestic currency.

Question 5

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.

Accepted Answer

A contractionary monetary policy typically involves the central bank selling government securities or raising the reserve requirements for banks, which effectively reduces the amount of funds banks have available to lend. This reduction in the supply of loanable funds leads to higher interest rates as borrowers compete for a smaller pool of available funds.

Question 6

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.

Accepted Answer

Contractionary monetary policy typically involves reducing the money supply or increasing interest rates, which makes borrowing more expensive. This leads to a decrease in spending and investment, causing aggregate demand to decrease.

Question 7

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.

Accepted Answer

A contractionary monetary policy typically involves reducing the money supply or increasing interest rates. Higher interest rates make domestic assets more attractive to foreign investors, leading to inflows of foreign capital.

Question 8

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.

Accepted Answer

Contractionary monetary policy typically involves increasing interest rates or reducing the money supply, which tends to decrease spending and investment. This reduction in demand leads to a decrease in both real GDP and the price level.

Question 9

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.

Accepted Answer

The answer of In an open economy, a contractionary monetary...

Question 10

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

Accepted Answer

A contractionary fiscal policy, which involves reducing government spending and/or increasing taxes, can help reduce a current account deficit by decreasing domestic demand and imports. A contractionary monetary policy, which involves increasing interest rates, can help combat inflation by reducing borrowing and spending. Together, these policies are consistent with addressing both issues.

Question 11

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

Accepted Answer

The term "crowding out" describes the phenomenon where increased government borrowing leads to higher interest rates, which can reduce private investment because the government competes with the private sector for financial resources.

Question 12

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

Accepted Answer

The answer of Fiscal and monetary policy have predictable effects...

Question 13

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.

Accepted Answer

The answer of The effect of a depreciation of the...

Question 14

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.

Accepted Answer

The "J curve" represents an initial worsening of the trade balance following a devaluation of a country's currency, before improving over time.

Question 15

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

Accepted Answer

Fiscal policy refers to the use of government spending and taxation policies to influence economic conditions, including aggregate demand, employment, and inflation.

Question 16

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

Accepted Answer

Monetary and fiscal policy are often focused on achieving internal balance because managing inflation and unemployment is crucial for the economic stability of a country, whereas the current account balance is more related to external trade and transactions.

Question 17

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

Accepted Answer

External balance refers to a situation where a country's current account (exports minus imports) is in equilibrium, not to government policies on unemployment and inflation, which relate to internal balance.

Question 18

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

Accepted Answer

External balance involves ensuring that the current account, which includes trade balance, net income, and current transfers, is balanced, meaning inflows equal outflows.

Question 19

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

Accepted Answer

Internal balance, which refers to achieving full employment and price stability within a country, is generally considered more crucial for sustainable economic growth and social welfare. External balance, focusing on a balanced international trade and payments position, is important but often seen as secondary to the health of the domestic economy.

Question 20

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

Accepted Answer

Government spending on goods and services varies significantly between countries and over time, and it is not typically as high as 45 percent of GDP for most economies. The percentage can range widely depending on the country's economic policies, size of the government, and level of development.

Quiz 17: Macroeconomic Policy and Floating Exchange Rates

In an open economy, an expansionary monetary policy:

An expansionary monetary policy:

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

A contractionary monetary policy:

As government adopts a contractionary monetary policy:

In a closed economy, a contractionary monetary policy causes:

In an open economy, a contractionary monetary policy causes:

In a closed economy, a contractionary monetary policy:

In an open economy, a contractionary monetary policy:

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.

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

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

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

The "J curve":