Suppose japan is currently running a current account

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48. Suppose Japan is currently running a current account surplus. The most effective way of eliminating this current account surplus would be to temporarily _____ government purchases and _____ the domestic money supply. (a) increase; increase (b) increase; decrease (c) decrease; increase (d) decrease; decrease Answer: A Level of difficulty: 3 Section: 13.4 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
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 _____. (a) depreciate; fall (b) appreciate; rise (c) depreciate; rise (d) appreciate; fall Answer: D Level of difficulty: 3 Section: 13.4 51. Under a system of fixed exchange rates, what happens if a country’s currency is overvalued? (a) The central bank loses official reserve assets. (b) The central bank gains official reserve assets. (c) The currency appreciates. (d) The exchange rate rises. Answer: A Level of difficulty: 1 Section: 13.5 52. Under a system of fixed exchange rates, what happens if a country’s currency is undervalued? (a) The central bank loses official reserve assets. (b) The central bank gains official reserve assets. (c) The currency depreciates. (d) The exchange rate falls. Answer: B Level of difficulty: 1 Section: 13.5 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 (a) they like large swings in currency values when devaluation or revaluation occur. (b) they profit by speculating on devaluation or revaluation. (c) they can plan better if they know what the exchange rate will be. (d) fixed exchange rates are economically efficient. Answer: C Level of difficulty: 1 Section: 13.5
212 Abel/Bernanke • Macroeconomics, Fifth Edition

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