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50 Cards in this Set
- Front
- Back
International trade can increase world output because |
it allows nations to devote their resources to their most efficient industries |
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If a country fixes its exchange rate and follows an independent stabilization policy, then it must |
equilibrate the exchange market by restricting the free flow of capital |
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comparative advantage in trade implies that |
world output will be increased if nations try to specialize in their relatively most efficient industries |
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the closing of the gold window in 1971 represented |
the end of the era of fixed exchange rates |
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Under the Bretton Woods system, countries were expected to maintain fixed exchange rates. If traders tried to sell more of a country’s currency than others wanted to buy,
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the country could receive a loan of reserves from the International Monetary Fund, but would have to adopt contractionary fiscal and monetary policies.
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Three ways to equilibrate the exchange market are
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adjustments in fiscal and monetary policy, capital controls, and flexible exchange rates.
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When two nations agree to reduce their import tariffs, in the goods market
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both imports and exports increase, causing no change in aggregate demand, but lower input prices and shifts in output to more productive industries cause an increase in aggregate supply.
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In the above graph the exchange market is out of equilibrium at the fixed exchange rate. Under the Bretton Woods system the United States would be required to “defend” the fixed exchange rate. This could be done by
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using capital controls to restrict the quantity of dollars supplied, to the amount at point 1.
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Under the Bretton Woods system, countries were expected to maintain fixed exchange rates. If traders tried to sell more of a country’s currency than others wanted to buy,
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the country could receive a loan of reserves from the International Monetary Fund, but would have to adopt contractionary fiscal and monetary policies.
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The above graph could represent the exchange market for the Thailand baht in the 1990’s (“b” stands for baht). Which of the following statements is best?
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When Thailand’s central bank ran short of foreign currency reserves, it could no longer support the fixed exchange rate, so the value of the baht fell to equilibrium at 3.
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If a country allows its exchange rate to fluctuate with the demand and supply of its currency, then it can |
allow the free flow of capital and use independent stabilization policies
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After the Smoot-Hawley tariff was imposed,
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U.S. imports decreased, but other countries retaliated with tariffs of their own, reducing U.S. exports, and the volume of world trade declined.
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The “interest equalization tax” imposed by the Johnson administration in the 1960’s was an attempt to
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reduce the supply of the dollar in exchange markets, by taxing away additional profits Americans earned from lending at higher interest rates in foreign countries
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In his economic speech on August 15, 1971, President Richard Nixon said that “if you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less.” This was because
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devaluation meant a fall in the exchange value of the dollar, which would increase the prices of foreign goods and foreign travel to Americans.
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Why did the Fed raise the discount rate in response to the gold drain in 1931?
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Higher interest rates would cause international investors to keep their wealth in the U.S.
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The 1968 income tax surcharge did not bring down aggregate demand growth because
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consumers base their spending on their expectations of permanent income, which a temporary tax surcharge did not change.
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The sudden rise in oil prices in 1973 caused
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a decrease in aggregate supply.
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The Wall Street Journal described monetary policy in 1979 as “a world turned upside-down.” They wrote this because
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the President’s administration wanted interest rates higher than the Federal Reserve wanted them.
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Which of the above goods market diagrams represents the same idea as the above Phillips Curve?
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Aggregate Demand goes up, Aggregate Supply goes down |
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Suppose the Federal Reserve responds to an oil shock with expansionary monetary policy. Which pair of graphs best represents this option?
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aggregate supply went down, aggregate demand went up. This caused the money supply to go up. |
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Economist James Tobin thought that the Kennedy administration should
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run a budget surplus and encourage the Fed to reduce interest rates. This would increase investment spending and increase potential output in the long run.
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OPEC
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is the Organization of Petroleum Exporting Counties, a cartel of oil producers
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The expansionary monetary policy of 1972 wrecked the strategy behind the Nixon administration’s wage and price controls, because
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as prices rose to their ceilings people began to expect inflation once the controls were removed
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Which of the following stopped the Great Inflation of the 1960’s and 1970’s?
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The Great Recession of 1981-82.
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what best describes why Volcker's recession ended the Great Inflation |
The long period of unemployed resources slowed the increase in input costs |
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Economist Milton Friedman pointed out that the Phillips Curve is not stable. When the unemployment rate drops below the natural rate, the Phillips Curve
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shifts outward, towards higher inflation rates at every unemployment rate
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One cause of the 1980 recession was
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the unexpectedly large reduction in consumer spending that resulted from the consumer credit controls
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Monetarism recommends that
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the Federal Reserve should set the growth rate of the money supply equal to the long-run rate of growth in real GDP
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Consider these data for the United States economy, 1966-1970. For the years 1967-1969, what would be an appropriate fiscal policy?
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Increase income taxes |
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Which of the following best describes the Federal Reserve’s policy for bringing down inflation in the early 1980’s?
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Reduce the money supply to increase interest rates, reducing aggregate demand. Hold output below potential long enough to reduce inflationary expectations, eventually increasing aggregate supply
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The 1968 income tax surcharge was intended to
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reduce aggregate demand growth and bring down the inflation rate
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The supply shock caused by the sudden rise in oil prices in 1973 resulted in
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a recession and higher inflation
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In 1979 the Federal Reserve began targeting the quantity of money. As a result
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interest rates increased |
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Consider these data for the United States economy, 1966-1970. For the years 1967-1969, what would be an appropriate monetary policy?
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The Fed should sell Treasury bonds |
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Suppose the Federal Reserve responds to a supply shock with no change in policy, depending instead on a recession to reduce input costs over the long run. Which of the above graphs best represents this shock and policy response?
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Aggregate Supply falls and then returns to equilibrium |
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In the early 1960’s the U.S. balance of payments problem meant that
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interest rates had to be kept high to support the exchange value of the dollar.
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When Gerald Ford became President in 1974, the inflation rate was 11%. The new President recommended a tax surcharge and government spending cuts. This was a
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counter-cyclical fiscal policy |
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Consider the above Phillips Curve data points for 1961 to 1970. Which pair of points best illustrates the effect on aggregate supply of rising inflationary expectations?
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1969-1970 |
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Which of the above diagrams best represents the results of a sudden increase in oil prices?
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aggregate supply decreases |
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At first, the Nixon administration’s mandatory wage and price controls in 1971 were intended to |
freeze prices for ninety days in order to bring down inflationary expectations.
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The Federal Reserve has a policy problem when faced with stagflation. This is because
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an increase in interest rates attacks inflation but makes unemployment worse, while a decrease in interest rates attacks unemployment but makes inflation worse. |
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In the equation of exchange, if real GDP rises by 5% per year, Monetarism recommends that |
the money supply be increased by 5% per year, to keep inflation at zero if velocity doesn’t change. |
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The economy was near potential output in 1965. Starting in that year, the Johnson administration increased spending on social programs and escalated the Vietnam War, while maintaining the Kennedy tax cuts. Inflation increased, and eventually inflationary expectations increased too. Which of the above goods market graphs best represents the results of the Johnson administration policies (a) and effects of rising inflationary expectations (b
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aggregate demand increases and aggregate supply decreases |
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Which of the following was not a cause of the Great Inflation of the 1960’s and 1970’s? |
the 1968 income tax surcharge |
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Johnson administration economists had hoped to “go down that [Phillips] curve just as you went up that curve.” This proved impossible because
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the high inflation rates at the end of the 1960’s caused an increase in inflationary expectations.
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President Ford’s Whip Inflation Now policy was
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an incomes policy intended to promote a voluntary reduction in inflationary expectations |
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Unions refused to cooperate with the Nixon administration’s Cost of Living Council, because under the wage and price controls,
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wages were set in Washington, rather than negotiated by unions.
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The economy was near potential output in 1965. Starting in that year, the Johnson administration increased spending on social programs and escalated the Vietnam War, while maintaining the Kennedy tax cuts. In 1968 the Congress passed an income tax surcharge to try to bring down consumer spending. Which of the above goods market graphs best represents the results of the Johnson administration policies (a) and theintended effects of the tax surcharge
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aggregate demand rose and then fell |
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In 1979 high inflation caused an increase in money demand, and Paul Volcker’s Federal Reserve used the quantity of money as its policy target. Which of the above graphs shows what happened to interest rates as a result?
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money demand rose and money supply fell |
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The Johnson administration pledged to raise taxes in early 1967, but the income tax surcharge was not passed until mid-1968. Meanwhile, the Federal Reserve agreed to reverse its contractionary policies in 1967. Which pair of the above graphs represents the policies of 1967?
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money supply and aggregate demand go up |