1. Exit Monetary Policy Foreign Exchange and Balance of Payments
Comparative and Absolute Advantage
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Exit

2. The open market sale of government securities.
Monetary Policy for 100
When the economy is operating below the full-employment level of output, an appropriate monetary policy would be to increase ______________.
The open market sale of government securities.
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3. Monetary Policy for 200 What is the federal funds rate?
The Federal Reserve decreases the federal funds rate by _____________.
The interest rate banks charge each other for short-term loans.
Buying government bonds on the open market.
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4. Monetary Policy for 300 What is fiat money?
Money that has no intrinsic value. It only has value because the government says it does.
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5. Monetary Policy for 400
Suppose all banks loan out all excess reserves and there are no currency drains. If the legal reserve requirement is 10% and Larry deposits the $100 bill he got from Mr. Peterson into his checking account, the maximum increase in the money supply would be _______________.
$900. The deposit expansion multiplier = 1/.10 or 10. Excess reserves = $ x $90 = $900.
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6. AD for 500
Type answer here.
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7. Foreign Exchange/Balance of Payments for 100
Assuming fixed exchange rates, if country Z’s rate of inflation increases relative to its trading partners, its imports and exports will likely change in what way?
Imports will increase and exports decrease. Foreign products will be relatively cheaper and Z’s exports will be more expensive to its trading partners.
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8. Foreign Exchange/Balance of Payments for 200
In an open economy, an increase in a government’s budget deficit will tend to cause the international value of a country’s currency and its trade deficit to change in which ways?
The increased budget deficit results in an increase in the demand for loanable funds. As a result, the real interest rate will increase, causing international financial capital to flow into the country. This results in its currency appreciating. As such, exports become more expensive and decrease, while imports become cheaper and increase. This would increase its trade deficit.
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9. Foreign Exchange/Balance of Payments for 300
What is a nation’s trade deficit?
When imports exceed exports.
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10. Foreign Exchange/Balance of Payments for 400
Which account do the following items belong to, current account, capital/financial, or official reserves account in a nation’s balance of payments? In addition, will these transactions be a credit or debit to the U.S. Balance of Payments?
An American buys a German Made Audi car.
A Saudi Arabian construction company buys an American made Catepillar bulldozer.
An American working in Italy sends money home to the USA?
Americans send aid money to Haiti for earthquake relief.
The Federal Reserve sells U.S. dollars.
Current/Debit
Current/credit. Even though this is a capital good, it counts in the current account as an export.
Current (net transfers)/credit
4. Current account/credit.
5. Official Reserves/credit.
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11. Foreign Exchange/Balance of Payments 500
If there is a deficit in a nation’s current account, there should be a ___________ in a nation’s capital/financial account? If this does not occur, which account will zero out the balance of payments.
Surplus/Official Reserves.
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12. Add title for 100 Type answer here.
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13. Add title for 200 Type answer here.
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14. Add title for 300 Type answer here.
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15. Add title for 400 Type answer here.
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16. Add title for 500 Type answer here.
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17. Comp/Absol. Advantage 100
Define Absolute Advantage. Define Comparative Advantage?
Absolute Advantage: When a nations produces more of a product than another nation or uses fewer resources to produce the same output. Comparative Advantage is when a country should produce a product because it has the lower opportunity cost to produce a product in terms of another product it could produce when compared with another nation.
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18. Comp/Absol. Advantage for 200
Using all of their resources, Alpha and Beta can produce the following alternative tons of grain and steel.
Alpha: 30 steel or 30 grain
Beta: steel or 10 grain.
Which nation has the absolute advantage in steel production? Grain production?
Which nation has the comparative advantage in steel production? Grain production?
Before specialization and trade, the domestic opportunity cost of producing 1 ton of grain in Alpha and Beta is which of the following:
Alpha Beta
1 ton of steel ton of steel
1 ton of steel tons of steel.
2 tons of steel ton of steel.
1 ton of steel ton of steel
0.33 ton of steel 1.5 tons of steel
Alpha. It produces more of both.
Grain – Alpha. Steel – Beta. This is because each has the lower opportunity cost in terms of the other product it could make.
B. Alpha has a 1 to 1 ratio of steel to grain, while Beta has a 1 to 2 ratio of steel to grain.
Beta 30
Grain
Alpha 10 20 30
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Steel

19. Foreign Exchange/Balance of Payments for 300
From the previous question, which nation should export grain and import steel and which should import grain and export steel? Why?
Alpha should export grain and import steel while Beta should import grain and export steel. This is because Alpha has the comparative advantage in grain and Beta the compartive advantage in steel. If they specialize and trade, they will improve their material well-being.
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20. Foreign Exchange/Balance of Payments for 400
From the previous questions, which of the following terms of trade between grain (G) and steel (S) would be mutually beneficial to both Alpha and Beta?
1G = 3.0S
1G = 1.5S
1G = 1.0S
1G = 0.5S
There is no real exchange ratio that would enable both nations to benefit, since Alpha has the absolute advantage in both goods. B.
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21. Type answer here.
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22. Add title for 100 Type answer here.
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23. Add title for 200 Type answer here.
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24. Add title for 300 Type answer here.
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25. Add title for 400 Type answer here.
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26. Add title for 500 Type answer here.
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