Monetary Policy Foreign Exchange and Balance of Payments Comparative

Monetary Policy Foreign Exchange and Balance of Payments Comparative and Absolute Advantage 100 100 100 100 100 200 200 200 200 200 300 300 300 300 300 400 400 400 400 400 500 500 500 500 500

Monetary Policy for 100 When the economy is operating below the fullemployment level of output, an appropriate monetary policy would be to increase . The open market sale of government securities. Push the Space Bar to check your answer. Push the Space Bar to check your answer.

Monetary Policy for 200 1. What is the federal funds rate? 2. The Federal Reserve decreases the federal funds rate by . 1. The interest rate banks charge each other for short-term loans. 2. Buying government bonds on the open market. Push the Space Bar to check your answer. Push the Space Bar to check your answer.

Monetary Policy for 300 What is fiat money? Money that has no intrinsic value. It only has value because the government says it does. Push the Space Bar to check your answer. Push the Space Bar to check your answer.

Monetary Policy for 400 Suppose all banks loan out all excess reserves and there are no currency drains. If the legal reserve requirement is 10% and Larry deposits the 100 bill he got from Mr. Peterson into his checking account, the maximum increase in the money supply would be . 900. The deposit expansion multiplier 1/.10 or 10. Excess reserves 90. 10 x 90 900. Push the Space Bar to check your answer. Push the Space Bar to check your answer.

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Foreign Exchange/Balance of Payments for 100 Assuming fixed exchange rates, if country Z’s rate of inflation increases relative to its trading partners, its imports and exports will likely change in what way? Imports will increase and exports decrease. Foreign products will be relatively cheaper and Z’s exports will be more expensive to its trading partners. Push the Space Bar to check your answer. Push the Space Bar to check your answer.

Foreign Exchange/Balance of Payments for 200 In an open economy, an increase in a government’s budget deficit will tend to cause the international value of a country’s currency and its trade deficit to change in which ways? The increased budget deficit results in an increase in the demand for loanable funds. As a result, the real interest rate will increase, causing international financial capital to flow into the country. This results in its currency appreciating. As such, exports become more expensive and decrease, while imports become cheaper and increase. This would increase its trade deficit. Push the Space Bar to check your answer. Push the Space Bar to check your answer.

Foreign Exchange/Balance of Payments for 300 What is a nation’s trade deficit? When imports exceed exports. Push the Space Bar to check your answer. Push the Space Bar to check your answer.

Foreign Exchange/Balance of Payments for 400 Which account do the following items belong to, current account, capital/financial, or official reserves account in a nation’s balance of payments? In addition, will these transactions be a credit or debit to the U.S. Balance of Payments? 1. An American buys a German Made Audi car. 2. A Saudi Arabian construction company buys an American made Catepillar bulldozer. 3. An American working in Italy sends money home to the USA? 4. Americans send aid money to Haiti for earthquake relief. 5. The Federal Reserve sells U.S. dollars. 1. 2. Current/Debit Current/credit. Even though this is a capital good, it counts in the current account as an export. 3. Current (net transfers)/credit 4. Current account/credit. 5. Official Reserves/credit. Push the Space Bar to check your answer. Push the Space Bar to check your answer.

Foreign Exchange/Balance of Payments 500 If there is a deficit in a nation’s current account, there should be a in a nation’s capital/financial account? If this does not occur, which account will zero out the balance of payments. Surplus/Official Reserves. Push the Space Bar to check your answer. Push the Space Bar to check your answer.

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Comp/Absol. Advantage 100 Define Absolute Advantage. Define Comparative Advantage? Absolute Advantage: When a nations produces more of a product than another nation or uses fewer resources to produce the same output. Comparative Advantage is when a country should produce a product because it has the lower opportunity cost to produce a product in terms of another product it could produce when compared with another nation. Push the Space Bar to check your answer. Push the Space Bar to check your answer.

Comp/Absol. Advantage for 200 Using all of their resources, Alpha and Beta can produce the following alternative tons of grain and steel. Alpha: 30 steel or 30 grain Beta: 20 steel or 10 grain. 1. 2. 3. Which nation has the absolute advantage in steel production? Grain production? Which nation has the comparative advantage in steel production? Grain production? Before specialization and trade, the domestic opportunity cost of producing 1 ton of grain in Alpha and Beta is which of the following: a) b) c) d) e) Alpha 1 ton of steel 1 ton of steel 2 tons of steel 1 ton of steel 0.33 ton of steel Beta 1 ton of steel 2 tons of steel. 1 ton of steel. 0.5 ton of steel 1.5 tons of steel 1. 2. 3. Alpha. It produces more of both. Grain – Alpha. Steel – Beta. This is because each has the lower opportunity cost in terms of the other product it could make. B. Alpha has a 1 to 1 ratio of steel to grain, while Beta has a 1 to 2 ratio of steel to grain. Beta 30 Grain Alpha 10 20 30 Push the Space Bar to check your answer. Push the Space Bar to check your answer.

Foreign Exchange/Balance of Payments for 300 From the previous question, which nation should export grain and import steel and which should import grain and export steel? Why? Alpha should export grain and import steel while Beta should import grain and export steel. This is because Alpha has the comparative advantage in grain and Beta the compartive advantage in steel. If they specialize and trade, they will improve their material well-being. Push the Space Bar to check your answer. Push the Space Bar to check your answer.

Foreign Exchange/Balance of Payments for 400 From the previous questions, which of the following terms of trade between grain (G) and steel (S) would be mutually beneficial to both Alpha and Beta? a) 1G 3.0S b) 1G 1.5S c) 1G 1.0S d) 1G 0.5S e) There is no real exchange ratio that would enable both nations to benefit, since Alpha has the absolute advantage in both goods. B. Push the Space Bar to check your answer. Push the Space Bar to check your answer.

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