Quiz

Question 1 (1 point)

Which of the following statements about a current account deficit is true?

Question 1 options:

A current account deficit is always a bad thing.

A current account deficit will always reflect a low propensity to save.

A current account deficit is always associated with a budget deficit.

A current account deficit will always cause a country's international investment position to deteriorate.

Question 2 (1 point)

"Expenditure switching" policies include

Question 2 options:

higher income taxes and higher tariffs;

higher tariffs and reductions in the exchange rate;

a switch in government spending from domestically produced goods to imported goods;

policies to encourage citizens to switch from spending to saving.

Question 3 (1 point)

Saved

In the balance of payments, investment income is included in the

Question 3 options:

capital account;

current account;

financial account;

investment account;

profit and loss account.

Question 4 (1 point)

The Open Economy 'Trilemma' indicates that a country cannot achieve at the same time

Question 4 options:

a fixed exchange rate, a balanced budget, and an independent monetary policy;

a flexible exchange rate, low interest rates, and free international capital mobility;

a fixed exchange rate, a balanced budget, and free international mobility;

a fixed exchange rate, an independent monetary policy, and free international capital mobility.

Question 5 (1 point)

The expression "sexenio crisis" refers to

Question 5 options:

financial crises which tend to occur in Mexico when there is a change of President

crises which tend to occur every six months in foreign exchange markets

a financial crisis which can only be resolved with the unanimous approval of the six permanent members of the IMF Board of Governors

a major crisis, one which is expected to last at least six months

Question 6 (1 point)

"Purchasing Power Parity" states that

Question 6 options:

in the short-run exchange rates reflect differences in inflation rates;

an increase in a country's purchasing power will result in the appreciation of that country's currency;

the lower the rate of inflation, the lower the exchange rate;

if a country has a higher rate of inflation than its trading partners, its exchange rate will decrease.

Question 7 (1 point)

With a flexible exchange rate system, an increase in Canada's equilibrium exchange rate relative to the U.S. dollar will necessarily occur when there is

Question 7 options:

an increase in American direct foreign investment in Canada, a decrease in U.S. exports to Canada, and an increase in the Canadian interest rate differential;

a decrease in Canada's rate of inflation, an increase in Canadian investment in the U.S., and a decrease in U.S. exports to Canada;

an increase in American direct foreign investment in Canada, a decrease in U.S. exports to Canada, and an increase in the Canadian inflation rate;

an increase in the forward exchange rate, increased Canadian investment in the U.S. and a decrease in Canada's rate of inflation.

Question 8 (1 point)

The "twin deficit hypothesis" states that

Question 8 options:

an increase in domestic investment will always be associated with a deficit in the current account;

a deficit on the financial account will always be balanced by an equal deficit on the current account;

if private savings equal domestic investment, the budget deficit will equal the current account deficit;

an increase in the budget deficit will always be associated with an equal increase in the current account deficit.

Question 9 (1 point)

The practice of buying and selling currencies and changing interest rates in the hope of creating a "herd effect" to influence the exchange rate is known as

Question 9 options:

a fixed exchange rate system

a target zone exchange rate system

a managed exchange rate system

a system of open market operations

Question 10 (1 point)

If a country which has a fixed exchange rate is faced with a decrease in the demand for its currency, the central bank will

Question 10 options:

use foreign exchange reserves to buy the home currency, raise interest rates, and increase taxes;

use foreign exchange reserves to buy the home currency, raise interest rates, and reduce taxes;

use foreign exchange reserves to buy the home currency, raise interest rates, and issue positive statements about the state of the economy;

raise interest rates, reduce government spending, and raise taxes.

Question 11 (1 point)

Saved

The balance of payments account is divided into the following sub-headings:

Question 11 options:

current account, capital account, financial account;

current account, tax account, expenditure account;

current account, investment account, capital account;

capital account, expenditure account, financial account, government account.

Question 12 (1 point)

Saved

Gross domestic product (GDP) is given by the following formula:

Question 12 options:

C + I - G + M - X

G - T + X

C + I + G + X - M

C + I + G + X - M + T

Question 13 (1 point)

Saved

The "infant industry argument" states that

Question 13 options:

free trade is only beneficial for countries which have high cost "infant" industries;

it will never be beneficial for countries to engage in trade if their industries are more fragile than those of other countries;

it is infantile to impose protectionism on international trade;

temporary protection for an industry may be beneficial in the long-run for the country that imposes the trade restrictions.

Question 14 (1 point)

Saved

Examples of protectionist measures are:

Question 14 options:

old age pensions, employment insurance, and disability benefits;

tariffs, quotas, and safety regulation selectively imposed on imported goods;

export taxes, tariffs and quotas;

regulations imposed on imported and locally produced goods to protect public health and safety.

Question 15 (1 point)

The theory of comparative advantage states that for any two countries:

Question 15 options:

the countries will only trade with each other if one country uses less labour than the other country in producing all tradeable goods;

the countries will trade with each other only if one country has an absolute advantage in the production of all goods;

trade will only take place if both countries produce goods of comparable quality;

even if one country is able to produce all goods at a lower absolute cost than the other, trade will still be beneficial to both countries if opportunity costs differ between the two countries;

trade will never take place if one country has a comparative advantage in the production of all goods.