ECON 1100 Chapter Notes - Chapter 14: Currency Appreciation And Depreciation, Potential Output, A Question Of Balance

ECO 330 – Chapter 1, Question 2:

The U.S. Internal Revenue Service (IRS) provides tax deductions for mortgage interest paid on both new and used homes by homeowners across the country. Utilizing the principle of economic incentives and their potential for unintended consequences, address the following points. Explain all in full.

a. What incentive does this give to U.S. residents?

b. Does it affect the type, style, or location of homes preferred by prospective home buyers?

c. What might happen to home values if the deduction were ever eliminated?

ECO 330 – Chapter 1 – Question 3

Historically, countries have oftentimes been tempted to merely print more money to pay off their debts. Utilizing your readings in this chapter, address the following points.

a. What might be the impact over time of such practices on the prices of everyday goods and services in these economies?

b. Investigate the Venezuelan economy. What is their current situation with price increases in that country? In other words, what is their inflation picture today? Explain some possible reasons for their situation.

c. In your opinion and based upon your readings, would it ever be possible for the U.S. to succumb to the same inflationary pressures as Venezuela?

*please number responce to question, thanks!

5-

In the short run, a tighter monetary policy by the U.S. Federal Reserve leads to:

Select one:

a. an increase in the supply of dollars and a dollar depreciation.

b. a decrease in the supply of dollars and a dollar appreciation.

c. an increase in the demand for dollars and a dollar depreciation.

d. a decrease in the demand for dollars and a dollar appreciation.

6-

Which theorem states that exchange rates will adjust until the prices of goods in different countries approximate one another?

Select one:

a. purchasing power parity

b. the law of multiple prices

c. the principle of comparative advantage

d. dollarization

7-

A country's balance of trade is the difference between its:

Select one:

a. nominal and real exchange rates.

b. monetary and fiscal policy.

c. exports and imports.

d. capital inflow and capital outflow.

8-

When a foreign business buys stock in a U.S. company, the U.S. capital account will:

Select one:

a. move in a positive direction.

b. move in a negative direction.

c. remain unchanged.

d. become more volatile.

9-

Saying that the United States is running a large current account deficit is equivalent to saying that:

Select one:

a. exports exceed imports in the United States.

b. the United States is running a large capital account surplus.

c. the balance of payments is negative.

d. the value of the current capital stock in the United States exceeds the value of future capital flows.

10-

An increase in the demand for a country's exports will have what effect on its currency?

Select one:

a. Its value will not change.

b. Its value will increase.

c. Its value will decrease.

d. Its value will depreciate.

11-

When the United States has a current account deficit, the U.S. capital account:

Select one:

a. will have a deficit also.

b. will be balanced.

c. will have a surplus.

d. must be falling.

12-

Which of the following is NOT a way that a country can finance a trade deficit?

Select one:

a. increased borrowing

b. sale of assets

c. decreased exports

d. reduction in cash reserves

13-

A trade deficit occurs when the value of a country's:

Select one:

a. imports exceeds the value of its exports.

b. exports exceeds the value of its imports.

c. inflow of foreign capital exceeds the outflow of domestic capital.

d. outflow of domestic capital exceeds its inflow of foreign capital.

14-

Which of the following is a U.S. current account transaction?

Select one:

a. Selling a computer chip to a resident in Europe.

b. Buying stock shares of a Canadian company.

c. Selling U.S. dollars in exchange for euros.

d. A foreign investor's purchase of a manufacturing plant in the United States.

15-

An exchange rate is:

Select one:

a. a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world.

b. the sum of the balance of trade, net income on capital held abroad, and net transfer payments.

c. the price of one currency in terms of another currency.

d. a currency whose value is not pegged but governments will intervene extensively in the market to keep the value within a certain range.

In recent years, the United States has had a very large deficit in the balance of trade on current account. Some critics have argued that this deficit has been a drag on economic growth in recent years. Some of those critics have argued that we ought to re-visit our country's commitment to free trade policies while other critics have argued that there are alternative ways to influence the balance of trade problems.


a. What is a "balance of trade on current account"? Currently, which is larger, exports or imports?


b. Why would this deficit be considered a "drag" on the national income? Any multiplier effects?


c. What are "managed" floating exchange rates?


d. Graph the exchange rate between the US dollar (US$) and the euro of the European Monetary Union (Please put dollars on the horizontal axis and euros/dollar on the vertical axis. Assume the current exchange rate is Euro.60 = US$1.00) Explain the effect of lowering the discount rate (by the Federal Reserve) on the market value of the dollar relative to the euro.