Question

1. When the government increases spending by issuing more bonds, it causes:

a) nations currency to appreciate

b)exports increase

c)interest rates decrease

d)demand for loanable funds decrease

e)decreases merchandise trade deficit

2. When the Fed decreases money supply to combat inflation, it cuases:

a)the price of the U.S. dollar to decrease

b) capital to flow out of the US

c)an increase in the merchandise trade deficit

d)an increase in private spending

e) a decrease in the interest rates

3. Which of the following is the most appropriate policy in order to make a surplus in the cpaital account?

a) Increase gov. spending

b) increase central bank's official reserve

c)decrease gov. spending

d)decrease gov. spending/ increase money supply

e) increase money supply

4. Which of the following will cause the twin deficit effect to worsen?

a) expansionary monetary policy

b)The fed increases official reserves

c)expansionary fiscal policy that increases fed. budget deficit

d)contractionary fiscal policy that decreases budget deficit

e) A contractionary fiscal policy and an expansionary monetary policy

5. True or false- The expansionary monetary policy and expansionary fiscal policy creates a larger federal budget deficit will have opposite effects on the merchandise trade balance.

a)True

b) False

6. Fiscal policy:

a) Manipulates the money supply in order to influence the economy

b)Is controlled by the Fed

c) Is the changes in gov. spending/taxation

d) Is the same in open/closed economies

e) Alters the interest rate.

Answer 1

1. When the government increases spending this raises demand for loanable funds, then the rate of interest and this causes the foreign capital to come in. National currency is appreciated and trade deficit is increased. Exports are reduced and imports are increased. Select A.

2. When the Fed decreases money supply, it raises the rate of interest. Capital starts flowing in the nation. National currency is appreciated and trade deficit is increased. Exports are reduced and imports are increased. Investment is reduced. Select C.

3. A surplus in the capital account is equivalent to a deficit in current account. This occurs when there is an increase in the rate of interest that brings in foreign capital  Select A.

4. When there is an increase in the government spending that raises its budget deficit, it will be financed through borrowing and this would raise the interest rate causing currency to appreciate and trade deficit to enlarge. Select C.

5. False

6. Select C.