chapter 19 - Chapter 19: Macroeconomic Policy and...

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Chapter 19: Macroeconomic Policy and Coordination under Floating Exchange Rates Multiple Choice Questions 1. Advocates of floating rate suggested it is favorable for economies for the following reasons EXCEPT that A. it discourages attack from foreign exchange speculators because of the fact that exchange rate adjustment is immediate. B. it helps stabilize the shock effect on unemployment in case of economic changes such as fall in export demand. C. it automatically matches the domestic inflation with ongoing foreign inflation. D. it gives every country the opportunity to guide its own monetary conditions at home. E. it brings the LR exchange rate to the level predicted by PPP without government policy decisions. Answer: C 2. Which of the following is NOT a result of a temporary fall in foreign demand on one country’s exports under floating exchange rate? A. The DD curve shifts to the left due to reduction of aggregate demand. B. The AA curve shifts downwards due to reduction of money supply. C. Aggregate output falls D. The home country’s currency depreciates. E. None of the above. Answer: B 3. Which of the following IS a result of a permanent fall in foreign demand on one country’s exports under floating exchange rate? A. The DD curve shifts to the left due to reduction of aggregate demand. B. The AA curve shifts upwards due to the increased expected long-run exchange rate. C. Output is reduced by a smaller degree compared to temporary fall in demand. D. The home country’s currency depreciates. E. ALL of the above. Answer: E
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4. Which of the following is/are INCORRECT (choose all that apply)? An argument against floating exchange rates is that A. a fixed rate automatically prevents instability in the domestic money market from affecting the economy if shocks come from the home domestic money market. B. a fixed rate automatically prevents instability in the economy from output market shocks. C. a rise in money demand under a fixed exchange rate would have no effect on the exchange rate and output. D. a rise in money demand under a floating exchange rate would have no effect on the exchange rate and output. E. All of the above. Answer: B, D 5. The MAIN reason behind the claims that the "Greater Autonomy" resulting from floating rates is illusionary is that A. there is no evidence backing the claim. B. the exchange rate is an important macroeconomic variable and policy makers will still consider its effect on the exchange rate. C. this claim is dependent on whom the government or policymakers are. D. None of the above. E. All of the above. Answer: B 6. Why will the "discipline" imposed on governments by a fixed exchange rate disappear under a floating rate regime be a problem? A. Tempted to follow over expansionary fiscal policy
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chapter 19 - Chapter 19: Macroeconomic Policy and...

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