You have just noticed that the dollar appreciated and

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49. You have just noticed that the dollar appreciated and you suspect that the American government was behind this change. Which would you choose as the most likely cause of this appreciation in the real exchange rate? (a) An increase in the money supply (b) A decrease in the money supply (c) A temporary increase in government purchases (d) A temporary decrease in taxes Answer: B Level of difficulty: 3 Section: 13.4
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Chapter 13 Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy 211 50. To encourage more investment, Mexico has lowered its tax rates to reduce the user cost of capital. Argentina is unable to pay back its foreign debts, causing its expected future marginal product of capital to fall. Mexico’s real exchange rate will _____ and its net exports will _____. 51. Under a system of fixed exchange rates, what happens if a country’s currency is overvalued? 52. Under a system of fixed exchange rates, what happens if a country’s currency is undervalued? 53. If a country has an overvaluation problem, the best solution is to (a) increase the official rate. (b) buy less of its currency in the foreign exchange market. (c) sell more of its currency in the foreign exchange market. (d) decrease the money supply. Answer: D Level of difficulty: 1 Section: 13.5 54. International businesses like a fixed-exchange-rate system because
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212 Abel/Bernanke • Macroeconomics, Fifth Edition 55. When a group of countries agree to share a common currency, they are said to have formed a 56. Currency unions are rare because
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