Q&A Hero

Q: Fracking involves: A) extracting certain forms of energy from shale rock formations B) deep water drilling for energy with minimal externalities C) the reduction of menu costs thus allowing prices to adjust more freely D) breaking down the production of goods resulting in more competitive markets

Q: How is a monopolistically competitive firm likely to respond to fluctuations in demand in the short run? A) by selling more or less at the posted price B) by changing prices C) by reducing menu costs D) by increasing menu costs

Q: Which of the following is NOT an example of a monopolistically competitive market? A) high fashion clothing B) medical care C) wheat D) automobiles

Q: Which of the following is NOT a characteristic of competitive markets? A) standardized product B) purchases and sales of individual traders are small relative to the total volume traded C) prices adjust quickly D) there are relatively few sellers

Q: Suppose a company expects prices in general to rise by 5%, but the price of its product rises by 2%. How will the company respond to the price change? A) It will increase production since it's getting a higher price for the product. B) It will increase production more slowly since it's price is rising more slowly than average. C) It will reduce production since it perceives a relative decline in the demand for its product. D) It will stop production and shut down until prices rise more quickly.

Q: If in the short run prices did not respond at all to changes in aggregate demand, the short-run aggregate supply curve would A) be vertical. B) be horizontal. C) slope up. D) slope down.

Q: Suppose that Ruritania has a fixed exchange rate versus the U.S. dollar. If foreign investors become convinced that the Ruritanian currency is overvalued, what actions might they take to profit from this conviction? Would these actions make it easier or harder for Ruritania to maintain the value of its currency versus the dollar? Why?

Q: In what sense does the IMF act as a lender of last resort? How might the IMF's actions during the Mexican crisis of the mid-1990s have contributed to the Asian currency crisis a few years later?

Q: Briefly describe how the Bretton Woods system worked. What advantages did it have over the gold standard? What problems did the Bretton Woods system eventually encounter?

Q: How did the use of the euro limit the use of monetary policy by European nations severely affected by the Financial Crisis of 2007-2009?

Q: How did maintaining the gold standard deepen the severity of the Great Depression?

Q: How can a country with a fixed nominal exchange rate, such as Greece, experience a lower real exchange rate? A) by experiencing higher inflation than its partners B) by experiencing deflation if its partners have low inflation rates C) by limiting the growth of productivity D) by increasing wages at a faster rate than inflation

Q: One reason for the controversy surrounding the decision by the European Central Bank to buy Greek bonds was that: A) it may increase moral hazard by encouraging other European governments to issue more debt than private investors were willing to buy B) it may increase adverse selection by encouraging other European governments to issue more debt than private investors were willing to buy C) it may result in higher risk premiums as private investors anticipate a default by Greece D) it may worsen the Greek recession by increasing Greek interest rates

Q: The "troika" that helped Greece avoid defaulting on its debt including all of the following EXCEPT: A) IMF B) European Central Bank C) World Bank D) European Commission

Q: Which of the following countries does NOT use the euro? A) Estonia B) Belgium C) Finland D) United Kingdom

Q: In 2012, the European Central Bank bought the debt of which nation? A) the United States B) France C) Spain D) Germany

Q: All of the following accurately describes China's currency peg EXCEPT A) pegging against the dollar ensured that Chinese exporters faced stable prices on exports to the U.S. B) some U.S. firms complained that the peg gave Chinese firms an unfair advantage over U.S. firms. C) the Chinese currency was allowed to depreciate moderately in the years preceding the financial crisis. D) many economists argued that the Chinese currency was undervalued.

Q: All of the following are advantages of currency pegging EXCEPT A) it reduces exchange rate risk. B) it is a check against inflation. C) it provides protection for firms that have taken out loans in foreign currencies. D) it keeps the exchange rate closer to its equilibrium rate.

Q: At the time monetary union in Europe began in 1999, which of the following countries declined to participate? A) France B) United Kingdom C) Italy D) Germany

Q: Members of the European Exchange Rate Mechanism (ERM) A) agreed to buy and sell gold at a fixed rate. B) promised to maintain the values of their currencies within a fixed range. C) attempted to maintain a fixed exchange rate against the dollar. D) all agreed to charge the same interest rate on central bank loans.

Q: The euro is A) the currency of all nations in Europe. B) the rate at which the French central bank makes discount loans. C) a common currency of many European countries. D) the name of the European central bank.

Q: Fixed exchange rate regimes A) existed prior to the nineteenth century but were then superseded by the gold standard. B) lower the transactions costs of buying and selling goods and assets. C) result in higher world interest rates. D) were first established by the GATT in 1971.

Q: If the U.S. dollar were to cease to be the leading international reserve currency, A) U.S. households and businesses would be unaffected. B) U.S. households and businesses would be subject to increased exchange rate risk. C) interest rates in the U.S. would be lower. D) the U.S. monetary base would contract.

Q: Currently, the dominant reserve currency is the A) U.S. dollar. B) Japanese yen. C) euro. D) British pound.

Q: The exchange rate system followed by the United States is known as A) the gold standard. B) a fixed exchange rate system. C) a flexible exchange rate system. D) a barter system.

Q: Currently, the price of gold is A) fixed by the United States. B) adjusted periodically by the IMF. C) adjusted periodically by the World Bank. D) determined in the market by demand and supply.

Q: Special Drawing Rights A) are granted by the Fed to banks which want to trade in the foreign exchange markets. B) were eliminated when the Bretton Woods system broke down. C) are created by the IMF in its role as lender of last resort. D) were created by the Nixon administration on August 15, 1971.

Q: At the 1976 IMF conference in Jamaica, A) the United States reaffirmed its commitment to buy and sell gold at a fixed price. B) currencies were formally allowed to float. C) the major countries of the world agreed to continue a system of fixed exchange rates. D) the gold standard was reestablished.

Q: On August 15, 1971, the United States A) returned to the gold standard. B) suspended the convertibility of dollars into gold. C) provided unlimited dollar reserves to the German central bank to help end a speculative attack on the mark. D) provided unlimited dollar reserves to the Bank of England to help end a speculative attack on the pound.

Q: The speculative attack on the German mark in 1971 resulted in A) a large increase in the German monetary base. B) a decline in the value of the mark relative to the dollar. C) a decision to end the floating of the mark against the dollar. D) a large decrease in the German monetary base.

Q: The speculative attack on the British pound in 1967 succeeded because A) the pound was seriously undervalued relative to the dollar. B) Britain decided to drop out of the Bretton Woods system. C) British exports greatly exceeded British imports, causing a large inflow of gold. D) the Bank of England lacked the international reserves to defend the existing exchange rate indefinitely.

Q: Why has the IMF come in for widespread criticism for its handling of the Asian financial crisis? A) It refused to make loans to any of the countries whose currencies were under speculative attack. B) Its policies did not sufficiently punish speculators with losses, giving rise to moral hazard. C) Its policies led to unsustainably low interest rates in a number of Asian countries. D) Its policies failed to lead to sufficient hardship for citizens in a number of Asian countries, giving rise to moral hazard.

Q: Which of the following statements is correct? A) A devaluation of the British pound would result in more dollars to the pound. B) A revaluation of the British pound would raise the prices of U.S. goods in Britain. C) A devaluation of the British pound would lower the prices of British goods in the United States. D) Revaluations and devaluations of a country's currency were not allowed under the Bretton Woods system.

Q: Under the Bretton Woods system, an asymmetry in the ability of central banks to defend their exchange rates existed because A) a country experiencing a balance of payments surplus was limited in its ability to defend its exchange rate by its stock of international reserves. B) a country experiencing a balance of payments deficit was limited in its ability to defend its exchange rate by its stock of international reserves. C) central banks were allowed by the IMF to adjust their exchange rates upward whenever they chose, but were rarely allowed to adjust their exchange rates downward. D) central banks were allowed by the IMF to adjust their exchange rates downward whenever they chose, but were rarely allowed to adjust their exchange rates upward.

Q: The fixed exchange rates of the Bretton Woods system were maintained A) by central bank interventions in the foreign-exchange market. B) by the requirement that short-term interest rates be equalized in all participating countries. C) by the requirement that long-term interest rates be equalized in all participating countries. D) through the automatic workings of the foreign-exchange market.

Q: The Bretton Woods system was expected to be more stable than the gold standard because A) the world supply of gold had increased greatly by the time the Bretton Woods system was established. B) large trade deficits and surpluses would be unlikely to occur under the Bretton Woods system. C) fewer countries were involved in the Bretton Woods system than had been involved in the gold standard. D) the IMF was set up to be a lender of last resort.

Q: Under the Bretton Woods system, exchange rates were supposed to be adjusted A) only when a country experienced fundamental disequilibrium. B) daily. C) weekly. D) following each annual meeting of the board of governors of the International Monetary Fund.

Q: The promise that was to hold the Bretton Woods system together was the agreement that A) no industrial country would allow high rates of inflation. B) foreign central banks would be able to convert U.S. dollars into gold at a fixed price. C) no country would raise tariffs on the products of other countries. D) all countries would be willing to redeem their paper currencies for gold.

Q: Under the Bretton Woods system the international reserve currency was the A) U.S. dollar. B) British pound. C) German mark. D) Japanese yen.

Q: The Bretton Woods system lasted from A) 1801 to 1861. B) 1863 to 1914. C) 1945 to 1971. D) 1981 to 1993.

Q: In the early 1930s A) countries that abandoned the gold standard suffered severe inflation. B) countries that tried to defend the gold standard suffered more depression than countries that abandoned the gold standard. C) the gold standard was abandoned by every major industrial country except England. D) the United States was the first major industrial country to abandon the gold standard.

Q: The gold standard probably made the Great Depression more severe in the United States because A) the value of gold declined sharply during those years. B) the existence of the gold standard kept prices from falling. C) the money supply in the United States increased rapidly as gold flowed into the country. D) the Fed attempted to reduce gold outflows by raising the discount rate.

Q: Which of the following was NOT considered to have been a drawback of the pre-1914 gold standard? A) It sometimes led to inflation, which several times in the late nineteenth century caused recessions in the United States. B) Countries had little control over their domestic monetary policies. C) Countries with trade deficits experienced deflation. D) Changes in the world money supply were strongly influenced by gold discoveries.

Q: Under the gold standard, if the demand for U.S. goods increased, which of the following would happen? A) Gold would flow into the United States. B) The U.S. monetary base would decline. C) Prices in the United States would fall. D) The United States would experience a balance of trade deficit.

Q: Why do some economists think a global savings glut contributed to the U.S. running a current account deficit in the 2000s?

Q: A nation with an official settlements balance of -$100 billion is likely to experience a: A) balance of payments surplus and accumulate $100 billion in international reserves B) balance of payments deficit and accumulate $100 billion in international reserves C) balance of payments surplus and a decline of $100 billion in international reserves D) balance of payments deficit and a decline of $100 billion in international reserves

Q: A nation with an official settlements balance of $50 billion is likely to experience a: A) balance of payments surplus and accumulate $50 billion in international reserves B) balance of payments deficit and accumulate $50 billion in international reserves C) balance of payments surplus and a decline of $50 billion in international reserves D) balance of payments deficit and a decline of $50 billion in international reserves

Q: If a nation's current account is -$200 billion and its financial account (excluding its official settlements balance) is $175 billion, how much is its official settlements balance? A) -$25 billion B) +$25 billion C) -$375 billion D) +$ 375 billion

Q: How did the global savings glut in the 2000s affect the U.S. current account balance? A) It caused it to decline by increasing the value of the dollar. B) It caused it to decline by reducing the value of the dollar. C) It caused it to increase by increasing the value of the dollar. D) It caused it to increase by reducing the value of the dollar.

Q: When a nation is said to be running a balance of payments surplus, this means its A) official settlements balance is positive. B) trade balance is positive. C) net financial account balance is positive. D) current account is positive.

Q: In the balance-of-payments accounts, the statistical discrepancy A) equals the capital account balance minus the current account balance. B) equals the current account balance minus the capital account balance. C) probably reflects hidden capital flows. D) must equal zero.

Q: The official settlement balance A) is an amount that the IMF requires each member country to pay annually. B) must by definition always be zero. C) equals the current account balance divided by the capital account balance. D) equals the net increase in a country's official reserve assets.

Q: Historically, the leading official reserve asset was A) gold. B) the U.S. dollar. C) the British pound. D) the German mark.

Q: When someone in a country buys an asset abroad, the transaction is recorded A) in the current account. B) in the official settlements balance. C) in the financial account as a capital inflow. D) in the financial account as a capital outflow.

Q: What accounted for much of policymakers' concern over U.S. current account deficits in the 1980s, 1990s, and 2000s? A) The current account deficits were thought to be largely responsible for the federal budget deficit. B) Current account deficits lower U.S. interest rates, thereby leading to reduced domestic saving. C) Current account deficits require the United States to borrow funds from foreign savers. D) The United States had signed international agreements in which it had pledged not to run a current account deficit for more than three years in a row.

Q: If the U.S. current account balance is negative, A) its financial account is likely to be positive. B) its financial account is likely to be negative C) it must use official settlements to balance its payments. D) its balance of payments cannot be zero

Q: In 2011, the net financial account balance was approximately A) $790 billion. B) -$790 billion. C) $394 billion. D) -$394 billion.

Q: What was the approximate value of the U.S. current account balance in 2011? A) +$10 billion B) +$79 billion C) -$380 billion D) -$475 billion

Q: Which of the following is NOT considered a payment in the balance of payments? A) capital outflows B) U.S. foreign aid to other countries C) imports of goods D) exports of services

Q: Which of the following is NOT considered a receipt in the balance of payments? A) exports of goods B) capital inflows C) import of services D) unilateral transfers to U.S. citizens

Q: The trade balance is A) by definition, identical to the current account balance. B) is a major portion, but not the only component, of the current account balance. C) almost invariably larger than the financial account balance. D) the largest component of the financial account.

Q: The current account balance plus the financial account balance A) equals the trade balance. B) equals the net outflow of currency from the domestic economy. C) will be negative during economic expansions and positive during economic contractions. D) equals zero.

Q: Which of the following is true of the U.S. balance of payments? A) It includes as receipts all inflows of funds from foreigners to the United States. B) It includes as receipts only inflows of funds used to purchase U.S. produced goods and services. C) It includes as receipts inflows of funds used to purchase U.S. goods or services or to acquire U.S. assets but not funds received as unilateral transfers. D) It includes as receipts inflows of funds used to purchase U.S. goods or services and funds received as unilateral transfers but not inflows of funds used to acquire U.S. assets.

Q: Make use of a graph of the foreign exchange market to show how the Central Bank of Mexico can use an unsterilized intervention to increase the value of its currency, the peso, in terms of the dollar.

Q: Make use of a graph of the foreign exchange market to show how the Brazilian Central Bank can use an unsterilized intervention to reduce the value of its currency, the real, in terms of the dollar.

Q: What alternative to restrictions on capital inflows do some economists recommend to minimize the possibility of increased lending booms and risk taking by domestic banks?

Q: Why do restrictions on capital inflows receive more support from some economists than restrictions of capital outflows?

Q: Discuss the problems associated with the imposition of capital controls.

Q: Throughout most of the post-World War II period, the use of capital controls by governments around the world was declining. But in the late 1990s, a number of governments expressed renewed interest in capital controls. What accounts for this renewed interest?

Q: If the Japanese central bank performed a sterilized intervention to reduce the value of the yen, the most likely result is: A) a lower value of the yen due to an increase in the monetary base in Japan. B) a lower value of the yen due to a decrease in Japanese interest rates. C) a higher value of the yen since the intervention was sterilized. D) no change in the value of the yen since neither the monetary base nor Japanese interest rates would be affected.

Q: How would monetary easing by the Bank of Japan affect the value of the yen? A) It increases it since more people will take out loans at the low interest rates. B) It reduces it since it reduces demand for yen since Japanese interest rates are now lower. C) It increases it since it increases demand for yen since Japanese interest rates are now higher. D) It reduces it since the supply of yen on the foreign exchange market is now lower.

Q: Capital inflow restrictions A) receive less support from economists than full capital controls. B) may lessen domestic lending booms and risk-taking by domestic banks. C) were imposed in the United States during the late 1990s. D) were imposed in Europe in May 2000.

Q: Countries in which region experienced disruptive capital flows in 1997-98? A) Eastern Europe B) Western Europe C) Latin America D) East Asia

Q: If a central bank engages in an unsterilized foreign-exchange intervention with the intention of raising the foreign-exchange value of its currency, A) the central bank's holdings of international reserves will fall. B) the domestic money supply will rise. C) domestic interest rates will fall. D) it will buy foreign assets.

Q: Which of the following will NOT result from an unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency? A) Domestic interest rates will rise. B) The foreign-exchange value of the domestic currency will rise. C) The central bank will experience a decrease in international reserves. D) The domestic money supply will rise.

Q: An unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency will result in A) higher domestic interest rates. B) lower domestic interest rates. C) an increase in the money supply. D) lower domestic interest rates and an increase in the money supply.

Q: If a central bank wishes to lower the foreign-exchange value of its currency, it will A) buy domestic currency and sell foreign assets. B) sell domestic currency and buy foreign assets. C) attempt to raise domestic interest rates. D) attempt to lower the domestic price level relative to foreign price levels.

Q: If a central bank wishes to raise the foreign-exchange value of its currency, it will A) buy domestic currency and sell foreign assets. B) sell domestic currency and buy foreign assets. C) attempt to reduce domestic interest rates. D) attempt to raise the domestic price level relative to foreign price levels.

Q: A central bank may be reluctant to see its currency appreciate because A) rising prices of imports will contribute to inflation. B) falling prices of exports will contribute to inflation. C) the country's goods may become uncompetitive in world markets. D) the country's monetary base will increase.

Q: The yen is considered to be stronger if: A) it takes fewer yen to acquire a foreign currency such as a dollar B) it takes more yen to acquire a foreign currency such as a dollar C) it takes fewer dollars to acquire a yen D) it takes fewer dollars and fewer euros to acquire a yen