Question

1. Which of the following statements is true?

a. If the price elasticity of demand for exports plus the price elasticity of demand for imports is greater than 1, a depreciation in a currency will improve the current account on the balance of payments

b. If the price elasticity of demand for exports plus the price elasticity of demand for imports is equal to 1, a depreciation in a currency will improve the current account on the balance of payments

c. If the price elasticity of demand for exports plus the price elasticity of demand for imports is less than 1 a depreciation in a currency will improve the current account on the balance of payments

d. If the price elasticity of demand for exports is greater than the price elasticity of demand for imports a depreciation in a currency will improve the current account on the balance of payments

2. The marginal propensity to import measures:

a. The total spending on imports

b. The extra spending on imports out of an extra pound

c. The total spending on imports divided by total income

d. The spending on imports as a percentage of spending on exports

3. Which of the following is an example of an expenditure switching policy to improve the current account of the balance of payments?

a. Higher income tax

b. Higher interest rates

c. Reduced government spending

d. Tariff

4. A country is likely to export products if it has...

a. A comparative advantage

b. A comparative disadvantage

c. A higher opportunity cost than other countries

d. High rates of inflation

Answer 1

1) option A is correct. This is the Marshall lerner condition under which depreciation of currency results in increasing net exports when the sum of export elasticity and import elasticity is greater than 1.

2) option B is correct. When income is increased by 1 dollar or 1 unit of a currency, amount spent on imports is then used to determine the marginal propensity to import

3) option D

4) option A