- True or False (could you explain your decision?):
- According to the Keynesians, unemployment persists because wages are sticky in the downward direction.
- A weak dollar in international currency markets may increase inflation.
- If the Fed accommodates an increase in inflation, then the rate of growth in the money supply is negative.
- Comparative advantage of a country in terms of producing a good implies that the country is able to produce this good with fewer resources than the other country.
- If the United States is a relatively capital abundant country, the Heckscher-Ohlin theory predicts that the United States will import capital intensive good from overseas.
- If the Fed wants the dollar to depreciate against the Japanese yen, a policy that is consistent with this goal would be for the Fed to jack up the discount rate.
- Explain how the following situations affect the United States' Balance of Payments. That is describe what components of the current and or capital account are changed and in what way.
- A U.S. marketing firm designs an ad campaign for a company in France.
- The Cornell Investment Club decides to buy 100 shares of a promising Korean automobile manufacturer.
- A consortium of European investors decides to build a large manufacturing facility in Montana.
- You are from India and you and your parents decide to send you to Cornell.
- Identify whether each of the following would lead to an appreciation or depreciation of the dollar. In each case, explain why the currency either appreciates or depreciates.
- U.S. citizens switch from buying stock in British companies to buying stock in U.S. companies.
- The inflation rate in the United States increases relative to the inflation rate in England.
- The money supply is increased in the United States.
- Income in the United States increases.
- Suppose an economy is represented by the equations below:
- Find Y* for this economy.
- Find the value of the government multiplier.
- What is the value of this economy’s current account in its balance of payments?
- Without using any explicit numbers, how would a sudden depreciation of the dollar alter Y*?
C = 300 + 0.6Yd
I = 400
G = 1,000
EX = 400
IM = 0.1Yd
Yd = Y-T
T = 1,000
- During 1981 and 1982, the president and the Congress were pursuing a very expansionary fiscal policy. In 1980 and 1981, the Federal Reserve was pursuing a very restrictive monetary policy in an attempt to rid the economy of inflation. Ultimately, the economy went into a deep recession, but before it did, interest rates went to record levels.
- Explain how this policy mix led to very high interest rates.
- Show graphically the effect of the high interest rates on the foreign exchange market. What do you think would happen to the value of the dollar under these circumstances?
- What impact was such a series of events likely to have on the trade balances in countries like Japan?
- The statement, “Inflation as a pure monetary phenomenon,” implies that
- the Fed can never lower inflation by decreasing the rate of growth in the money supply.
- inflation results because of cheaperimports.
- inflation increases the value of the nation’s money supply.
- the Fed has always liked inflation.
- none of the above.
- Suppose the dollar has been falling in value for more than 18 months against major currencies in the world. If the Fed increases the money supply to accommodate a growth in output
- it is following a contractionary monetary policy.
- it is not accommodation inflation
- the dollar will fall even further.
- the dollar will increase in value in the currency markets.
- If Japan is a capital abundant country and exports AND imports a large number of automobiles every year, her trade flow in automobiles is most likely based on
- product differentiation
- the Heckscher-Ohlin theorem.
- the theory of comparative advantage.
- the theory of absolute advantage.
- all of the above.
- The supply of foreign exchange will decrease if which of the following occurs?
- Demand for U.S. goods decreases overseas.
- The U.S. demand for imported goods decreases.
- The U.S. demand for imported goods increases.
- Demand for U.S. goods increases overseas.
- Suppose there is a decline in the U.S. demand for British goods. You would predict that
- the demand curve for dollar will shift to the right and the pound will appreciate.
- the supply curve for the pound will shift to the left and the dollar will appreciate.
- the demand curve for the pound will shift to the right and the pound will appreciate.
- the demand curve fo4r the pound will shift to the left and the pound will depreciate.
- Imports
- supply us with foreign exchange, and thus they are registered as a credit item in the balance of payments current account.
- supply us with foreign exchange, and thus they are registered as a debit item in the balance of payments current account.
- cause foreign exchange to leave the country, and thus they are registered as a debit item in the balance of payments current account.
- cause foreign exchange to leave the country, and thus they are registered as a credit item in the balance of payments current account.