IF Chapter 8 (3)

Advocates of flexible exchange rates claim that under flexible exchange rates, if the central bank faced unemployment

• and thus wished to decrease its money supply, there would no longer be any legal barrier to the currency depreciation this would cause.

• and thus wished to expand its money supply, there would no longer be any legal barrier to the currency depreciation this would cause.

• and wished to expand its money supply, there would no longer be any legal barrier to the currency appreciation this would cause.

• and wished to decrease its money supply, there now would be a legal barrier to the currency depreciation this would cause.

• and wished to increase output, there would no longer be a legal barrier to the currency appreciation this would cause.

Advocates of flexible exchange rates claim that under flexible exchange rates, a currency

• appreciation caused by increasing the money supply would reduce unemployment by lowering the relative price of domestic products.

• depreciation caused by increasing the money supply would increase unemployment by lowering the relative price of domestic products.

• depreciation caused by increasing the money supply would reduce unemployment by lowering the relative price of domestic products.

• depreciation caused by increasing the money supply would reduce unemployment by increasing the relative price of domestic products.

• depreciation caused by decreasing the money supply would not effect unemployment, but would increase the relative price of domestic products.

Advocates of flexible exchange rates claim that under flexible exchange rates, a currency

• depreciation caused by increasing the money supply would reduce unemployment by increasing world demand for them.

• appreciation caused by increasing the money supply would reduce unemployment by increasing world demand for them.

• appreciation caused by decreasing the money supply would reduce unemployment by increasing world demand for them.

• appreciation caused by increasing the money supply would increase unemployment by increasing world demand for them.

• appreciation caused by increasing the money supply would increase unemployment by decreasing world demand for them.

Advocates of flexible exchange rates claim that under flexible exchange rates, a currency

• depreciation caused by increasing the money supply would reduce unemployment by lowering the relative price of domestic products and increasing the world demand for them.

• appreciation caused by increasing the money supply would reduce unemployment by lowering the relative price of domestic products and increasing world demand for them.

• appreciation caused by decreasing the money supply would reduce unemployment by lowering the relative price of domestic products and increasing world demand for them.

• appreciation caused by increasing the money supply would increase unemployment by lowering the relative price of domestic products and increasing world demand for them.

• appreciation caused by increasing the money supply would increase unemployment by lowering the relative price of domestic products and by decreasing world demand for them.

Advocates of flexible exchange rates claim that under flexible exchange rates, the central bank of

• an overheated economy could cool down activity by increasing the money supply without worrying that undesired reserve inflow would undermine its stabilization effort.

• a cooled economy could cool down activity by contracting the money supply without worrying that undesired reserve inflow would undermine its stabilization effort.

• an overheated economy could cool down activity by contracting the money supply without worrying that undesired reserve inflow would undermine its stabilization effort.

• an overheated economy could cool down activity by contracting the money supply without worrying that undesired reserve outflow would undermine its stabilization effort.

• an overheated economy could cool down activity by decreasing employment and increasing output without worrying that this would undermine its stabilization effort.

Advocates of flexible exchange rates claim that under flexible exchange rates

• enhanced control over fiscal policy would allow countries to dismantle their distorting barriers to international payments.

• reduced control over monetary policy would allow countries to dismantle their distorting barriers to international payments.

• enhanced control over monetary policy would allow countries to increase their distorting barriers to international payments.

• enhanced control over monetary policy would allow countries to dismantle their distorting barriers to international payments.

• enhanced control over monetary policy would destabilize exchange rates.

By the end of the 1960s, many countries felt that they were importing inflation from

• the United States.

• Germany.

• France.

• Japan.

• the United Kingdom.

Which one of the following statements is TRUE?

• A) By devaluing its currency, that is, by lowering the domestic currency price of foreign

  currency, a country can insulate itself completely from an inflationary increase in foreign prices.

• B) By revaluing its currency, that is, by increasing the domestic currency price of foreign

  currency, a country can insulate itself completely from an inflationary increase in foreign prices.

• C) By revaluing its currency, that is, by lowering the domestic currency price of foreign

  currency, a country cannot insulate itself completely from an inflationary increase in foreign

  prices.

• D) By revaluing its currency, that is, by lowering the domestic currency price of foreign

  currency, a country can insulate itself completely from an inflationary increase in foreign prices.

• E) By revaluing its currency, that is, by lowering the domestic currency price of foreign

  currency, a country cannot insulate itself completely from a harmful decrease in foreign prices.

When all changes in the world are due to

• fiscal policy, purchasing power parity holds true in the long run.

• monetary policy, purchasing power parity does not hold true in the long run.

• monetary policy, purchasing power parity holds true in the long run.

• monetary policy, purchasing power parity holds true even in the short run.

• fiscal and monetary policy, purchasing power parity holds true in the long run.

Federal Reserve Chairman Volcker's policy to fight inflation

• led to the 1981-1983 recession, but was ultimately successful.

• led to the 1981-1983 recession, but did not end high inflation due to beggar-thy-neighbor effects.

• was perfectly complemented by Reagan's decrease in fiscal spending.

• led to the 1981-1983 recession and foretold the economic downturn in the mid-1990s.

• led to an immediate depreciation of the dollar.