Briefly explain the behavior of the Federal Reserve considering a balance of payments disequilibria within a fixed exchange rate system
What will be an ideal response?
If there were a balance of payments deficit (excess supply of dollars in the foreign exchange market), there would be downward pressure on the exchange rate. In order to prevent the exchange rate from falling, the Fed would effectively increase the demand for dollars by supplying foreign currencies. On the other hand, if there were a balance of payments surplus (excess demand for dollars in the foreign exchange market), there would be upward pressure on the exchange rate. In order to prevent the exchange rate from rising, the Fed would effectively increase the supply of dollars by demanding foreign currencies.
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Suppose that the interest rate available to you on a long-term bond is 4 percent. If you hold $1,000 of your wealth in currency instead of in the form of a bond, the annual opportunity cost is
A) $0.04. B) $4. C) $40. D) $400.
The equation of exchange
A) is MV = PY. B) becomes the quantity theory if velocity and the price level are constant. C) cannot be used in an economy with inflation. D) All of the above answers are correct.
Refer to Table 2-16. Does either Estonia or Finland have an absolute advantage and if so, in what product?
A) Estonia has an absolute advantage in lumber. B) Finland has an absolute advantage in lumber. C) Estonia has an absolute advantage in cell phones. D) Finland has an absolute advantage in both products.
All taxes carry which of the following costs?
A. Time in creating procedures for collecting revenues B. Enforcing tax payments C. Managing collected funds D. All taxes incur all of these costs.