4. Given the following Keynesian model:
(a) Calculate the equilibrium level of income and indicate the value of the current account balance
when the economy is at its equilibrium income level.
(b) Suppose that all equations in the model above stay the sam
(a) Could there be "overshooting" of the exchange rate in the Dornbusch model if goods
markets adjusted as rapidly as asset markets? Why or why not?
(b) What would be the analog to the general phenomenon of "overshooting" in a situation of
27. The effectiveness of monetary policy in influencing national income will, under a system of fixed
exchange rates, be _ under a system of flexible exchange rates.
A. greater than
B. less than
C. perhaps greater than; perhaps less than
D. the same as
If, in a demand curve/supply curve graph with the quantity of U.S. imports plotted on the
horizontal axis and the price of U.S. imports in dollars plotted on the vertical axis, suppose that,
from an initial equilibrium position, there is now a depreci
Suppose that, at the equilibrium level of income in a country, the country has a current account
(X- M) deficit of 60. The country's marginal propensity to consume = 0.7, and the country's
marginal propensity to import = 0.2. If contraction in imports
In the Mundell analysis in which, in a situation of fixed exchange rates, a country is using
monetary and fiscal policy to attain "external balance" (i.e., balance-of-payments equilibrium)
and "internal balance" (i.e., full employment without inflatio
14. In the following diagram, with fixed exchange rates,
In the situation pictured above, during the automatic adjustment process to the disequilibrium in
the balance of payments,
A. the BP curve will shift to the left (or vertically upward).
B. the IS cu
Chapter 23 Key
Appleyard - Chapter 23 #1
Suppose that there is an increase in the supply of foreign exchange due to an inflow of foreign
investment in a flexible-rate system. Explain how this would affect the balance on current
account, being carefu
Other things equal, a domestic monetary or financial shock (a shift in the LM curve) tends to
produce what relative degree of GDP change for the home country under a situation of flexible
exchange rates compared to a situation of fixed exchange rates?
14. Stagflation can result
A. from an increase in the price of foreign-produced inputs.
B. from a fall in aggregate demand.
C. whenever an economy has completely flexible money wages and prices.
D. from a rightward shift of the short-run aggregate supply
Given the following table showing various $/ exchange rates and the respective quantities of
pounds demanded by U.S. buyers:
Using the information in the table above, the arc elasticity of demand for pounds between the
$2.50/1 exchange rate and the $2
6. Suppose that, for a country, its money supply (Ms) is at the moment equal to its demand for money
(Md). Now suppose that the country's central bank pumps new money into the economy. The
result of this central bank action, other things equal, is that th
18. In the Dornbusch "overshooting" model, asset markets adjust _ rapidly to disturbances
than do goods markets, and therefore the exchange rate and the price level _
proportionately to each other in the short run.
A. more; move
B. more; do not move
16. The IS/LM/BP analysis suggests that, if the BP curve is flatter than the LM curve and the
exchange rate is flexible, expansionary fiscal policy will lead to _ of the country's
currency, which will make the fiscal policy _ effective in influencing nati
5. How could exchange rate protection of, for example, 10 percent, be duplicated in its effects across
export and import-substitute industries by using tariffs and subsidies instead? Explain. Suppose
that you are a firm in an import-substitute industry th
A major advantage of the system of flexible exchange rates (as opposed to fixed exchange
rates) is commonly thought to be
A. the likelihood that external monetary shocks will not influence domestic national income
under flexible exchange rates.
16. The IS/LM/BP analysis suggests that an external real sector shock, such as a rise in national
income abroad will cause, under fixed exchange rates, a _ shift in a home country's BP
curve (assuming that short-term financial capital is not perfectly mob
7. Assume a two-country world containing country A (whose currency is the dollar) and country B
(whose currency is the peso). In this context, and using relevant graphs, explain how a
depreciation of the dollar against the peso (for example, a 10% depreci
The derivation of the aggregate demand curve (AD) in the closed economy builds upon the fact
that, as the domestic price level rises, other things equal, the equilibrium level of income in the
IS/LM diagram _.
B. is unchanged
15. In a Keynesian open-economy income model, an increase in autonomous investment in a country
is likely to lead to what impact (if any) on national income in a trading partner country?
A. an increase
B. a decrease
C. no change
D. an increase, a decrease
If national income is greater than spending by domestic residents, then the country will have, in
its balance of trade (or balance on current account)
A. a deficit.
B. a surplus.
C. neither a deficit nor a surplus.
D. either a deficit or a surplus - c
Assume an initial equilibrium position for the economy (at the three-way intersection of the IS,
LM, and BP curves), and also assume that the BP curve is vertical. This situation is one where
there is _ of financial capital internationally, and, from
23. Other things equal, a rise in income in a country will lead to _ in the demand for money
in the country and consequently to _ in the country's LM curve.
A. an increase; a leftward (or vertically upward) shift
B. an increase; a rightward (or vertically
27. If exchange rates are fixed, an increase in the money supply will lead to _ in the
equilibrium level of income and to _ in the price level.
A. an increase; no change
B. no change; no change
C. an increase; a decrease
D. an increase; an increase
28. In the Bretton Woods international monetary system, a country's currency, unless its par value or
parity value were officially changed, could not deviate more than _ from its par value or
parity value. If the country's currency depreciated to its low
Under the international monetary system as it actually operated between 1947 and 1971, the
emergence of seemingly chronic deficits and surpluses in various countries'
balance-of-payments positions (i.e., deficits and surpluses which did not seem to ge
16. The simple Marshall-Lerner condition would suggest that one of the following cases would
produce a worsening of the trade balance if the country's currency depreciated. Which one? (The
negative sign on elasticities is being ignored; also, assume that
Chapter 22 Summary
Appleyard - Chapter 22
# of Questions
2. Suppose that there is an increase in the supply of foreign exchange due to an inflow of foreign
investment in a flexible-rate system. Explain how this would a
In the graph below, if point W represents the income and interest rate targets under a country's
fixed exchange rate system, then the policy combination needed to reach point W consists of
A. expansionary monetary policy and expansionary fiscal policy.
In the monetary approach to the balance of payments, under flexible exchange rates, an
increase in the proportion of income that people in country A wish to hold as money would,
other things equal, lead to an _ in country A's balance of payments and t