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business
micro economics

Questions and Answers of Micro Economics

What is arbitrage? What is its result? What is triangular arbitrage? What are cross rates?
Why is the measure of the balance‐of‐payments deficit or surplus not strictly appropriate under a flexible exchange rate?
What is meant by a spot transaction and the spot rate? A forward transaction and the forward rate? What is meant by a forward discount? Forward premium? What is a currency swap? What is a foreign
What is meant by foreign exchange risk? How can foreign exchange risks be covered in the spot, forward, futures, or options markets? Why does hedging not usually take place in the spot market?
What is meant by speculation? How can speculation take place in the spot, forward, futures, or options markets? Why does speculation not usually take place in the spot market? What is stabilizing
If the positive interest rate differential in favor of a foreign monetary center is 4 percent per year and the foreign currency is at a forward discount of 2 percent per year, roughly how much would
Which are the modern and the traditional exchange rate theories? What distinguishes them? What is the relevance of each? What is the relationship between them?
What is the relative importance of stock adjustments in financial assets as compared with adjustments in trade flows for exchange rate changes in the short run and in the long run according to the
What is the role of expectations and the risk premium in the asset market or portfolio balance approach? Why was there no risk premium in the monetary approach?
How do the monetary and the asset market or portfolio balance approaches explain the overshooting in exchange rates that is often observed in foreign exchange markets today?
Do empirical tests support or reject the monetary and portfolio approaches?
What additional theoretical and empirical work needs to be done? What is likely to be the outcome of this additional work in the foreseeable future?
What is the purchasing‐power parity theory? What are its uses? What is the absolute purchasing‐power parity theory? Why is this not acceptable?
What is the relative purchasing‐power parity theory? Do empirical tests confirm or reject the relative purchasing power parity theory?
What is demand for money according to the monetary approach to the balance of payments? What is the supply of money of the nation? What is meant by the monetary base of the nation? The money
How does a deficit or a surplus in the nation's balance of payments arise according to the monetary approach? Why do nations lose control over their money supply in the long run under fixed exchange
How does the monetary approach explain the process by which a balance of payments disequilibrium is corrected under a flexible exchange rate system? How does this differ from the case of fixed
What determines the value of the exchange rate and its change under a flexible exchange rate system according to the monetary approach? How does a managed floating exchange rate system compare
What is the role of expectations and uncovered interest arbitrage in the monetary approach to the balance of payments?
What is meant by the asset market or portfolio balance approach? In what ways does it differ from the monetary approach?
Suppose that a nation's nominal GDP = 100, V = 4, and Ms = 30. Explain why this nation has a deficit in its balance of payments.
How does a depreciation or devaluation of a nation's currency operate to eliminate or reduce a deficit in its current or balance of payments?
What is the J‐curve effect?
Why may elasticity pessimism be unjustified? What is the prevailing view today as to the stability of foreign exchange markets and the elasticity of the demand and supply curves of foreign exchange?
What is meant by a currency pass‐through? What is its relevance for international competitiveness?
How are exchange rates determined under the gold standard?
How are trade deficits and trade surpluses automatically eliminated under the gold standard?
Why is a depreciation or devaluation of the nation's currency not feasible to eliminate a deficit if the nation's demand supply curves of foreign exchange are inelastic?
How is the nation's demand curve for foreign exchange derived? What determines its elasticity?
How is the nation's supply curve of foreign exchange derived? What determines its elasticity?
Why is a devaluation or depreciation inflationary?
What shape of the demand and supply curves of foreign exchange will make the foreign exchange market stable? Unstable?
What is the Marshall-Lerner condition for a stable foreign exchange market? For an unstable market? for a depreciation to leave the nation's balance of payments unchanged?
Why will a depreciation of the deficit nation's currency increase rather than reduce the balance‐of‐payments deficit when the foreign exchange market is unstable?
What is meant by elasticity pessimism? How did it arise?
How does the automatic income adjustment mechanism operate to bring about adjustment in a nation's balance of payments? What are the variables that we hold constant to isolate the income adjustment
What is the multiplier formula for an autonomous increase in investment in Nation 1? In Nation 2? How are foreign repercussions related to international business cycles?
What is meant by the elasticity approach? The absorption approach? In what way does the absorption approach integrate the automatic price and income adjustment mechanisms?
What happens to the trade balance of a deficit nation if it allows its currency to depreciate or devalue from a position of full employment? How can real domestic absorption be reduced?
What is meant by automatic monetary adjustments? How do they help to adjust balance‐of‐payments disequilibria?
How do all the automatic adjustment mechanisms operate together to correct a deficit in a nation's balance of payments under a fixed or managed exchange rate system when the nation operates at less
What is meant by a closed economy? By desired or planned investment, consumption, and saving? What is meant by investment being exogenous? What are a consumption function, a saving function, and an
What do the MPC and the MPS measure?
How is the equilibrium level of national income determined in a closed economy? How is the size of the closed economy multiplier (k) determined?
What is meant by exports being exogenous? What is meant by MPM, APM, and nY?
How is the equilibrium level of national income determined in a small open economy? What is the value of the foreign trade multiplier (k')?
What is meant when we say that the automatic income adjustment mechanism brings about incomplete adjustment in the balance of trade or payments?
What is meant by foreign repercussions? When is it not safe to ignore them?
What is the multiplier formula for Nation 1 with foreign repercussions for an autonomous increase in its exports that replaces domestic production in Nation 2?
Under what conditions would Equation (17-8) not hold in the real world?
Why do nations need policies to adjust balance‐of‐payments disequilibria? Which are the most important objectives of nations?
How can a nation use fiscal and monetary policies to correct unemployment and a balance‐of‐payments deficit with flexible exchange rates and imperfect capital mobility? with perfect international
What does the IB curve show? Why is it positively inclined? What does the EB curve show? Why is it positively inclined? Why is the EB curve usually flatter than the IB curve? Why should the nation
What are the criticisms faced by the policy mix of using fiscal policy to achieve internal balance and monetary policy to achieve external balance? What happens when the additional objectives of
What is meant by direct controls? Trade controls? Exchange controls? Explain how the most important forms of trade and exchange controls operate to affect the nation's balance of payments.
What are the advantages and the disadvantages of direct controls? Why do direct controls to affect the nation's balance of payments require international cooperation to be effective?
What policies can nations utilize to achieve their objectives? How do these policies operate to achieve the intended objectives?
What is meant by the principle of effective market classification? Why is it crucial that nations follow this principle?
What does the EE curve in the Swan diagram show? What does the YY curve show? What are the four zones of external and internal imbalance defined by these two curves? What does the point of
What does the IS curve show? Why is it negatively inclined? What does the LM curve show? What is meant by the transaction and speculative demands for money? Why is the LM curve usually positively
What effects do expansionary and contractionary fiscal policies have on the IS curve? What effects do easy and tight monetary policies have on the LM curve? Do fiscal and monetary policies directly
How can fiscal and monetary policies be used to achieve full employment and external balance under fixed exchange rates and limited international capital mobility? With high international capital
Why is monetary policy completely ineffective with perfect international capital mobility under fixed exchange rates?
Why is it important to examine the relationship between prices and output in our analysis of open‐economy macroeconomics? How are prices incorporated into the analysis of open‐economy
Why must the Marshall-Lerner condition be satisfied for an open economy's aggregate demand curve to be more elastic than if the economy were closed?
How is an open economy's aggregate demand curve derived under flexible exchange rates? Why is this more elastic than if the nation were a closed economy or for an open economy with fixed exchange
How does the effect of a real‐sector shock on the nation's aggregate demand differ under fixed and flexible exchange rates?
How does the effect of a monetary shock on the nation's aggregate demand differ under fixed and flexible exchange rates from the case of a real‐sector shock?
Why is fiscal policy effective but monetary policy ineffective under fixed exchange rates? Why is the opposite true under flexible rates?
What does the aggregate demand curve in a closed economy show? How is it derived? Why is it downward sloping?
Why is a reduction in the general price level for a given money supply shown as a movement down a given aggregate demand curve, while an increase in the money supply for a given price level is shown
How does an increase in government expenditures affect the AD curve? Why? To what kind of fiscal policy does this refer?
What does the aggregate supply curve show? How does the long‐run aggregate supply curve differ from the short run aggregate supply curve?
What is the natural level of output?
How can a nation's output temporarily deviate from its natural level? Why and how a nation does's output return to its long‐run natural level?
Using an aggregate demand and an aggregate supply framework, explain why a nation must necessarily be in short‐run equilibrium if it is in long‐run equilibrium. How can the nation be in
How is an open economy's aggregate demand curve derived under fixed exchange rates? Why is this more elastic than if the nation were a closed economy?
How does a flexible exchange rate system in general adjust balance‐of‐payments disequilibria? How does a fixed exchange rate system in general adjust balance‐of‐payments disequilibria? Why
What is meant by an adjustable peg system? What are the advantages and disadvantages of an adjustable peg system with respect to a system of permanently fixed exchange rates?
What is meant by a crawling peg system? How can such a system overcome the disadvantage of an adjustable peg system?
What is meant by a managed floating exchange rate system? How does the policy of leaning against the wind operate? What is the advantage of a managed floating system with respect to a freely
What is meant by dirty floating? How well is the present managed floating system operating?
What is meant by international macroeconomic policy coordination? Why is it needed? How does it operate?
How large are the potential benefits from greater macroeconomic policy coordination? How likely is it that we will see much greater macroeconomic policy coordination among the leading industrial
What are the two main types of advantage of a flexible as opposed to a fixed exchange rate system? What are the specific advantages subsumed under each main type of advantage of a flexible exchange
What are the alleged advantages of a fixed over a flexible exchange rate system? How would the advocates of flexible exchange rates reply?
On the basis of the theoretical and empirical evidence available, indicate what overall conclusion can be reached on whether a flexible or a fixed exchange rate system is preferred.
What is meant by an optimum currency area or bloc?
What are the main advantages and disadvantages of an optimum currency area? What are the conditions required for the establishment of an optimum currency area?
What is meant by the European Monetary System? How has it functioned since its establishment? What is the European Monetary Union? The euro? What is the function of the European Central Bank?
What is the effect of increasing the allowed band of exchange rate fluctuation under a fixed exchange rate system?
What is meant by an international monetary system? How can international monetary systems be classified?
What was meant by the dollar shortage? Dollar glut? What were Roosa bonds? What was the purpose of the Interest Equalization Tax and the Foreign Direct Investment Program?
What was the Smithsonian Agreement? What is meant by the European snake? The dollar standard? Adjustment, liquidity, confidence?
What was agreed on at the Jamaica Accords?
How is the value of the SDR determined today? What additional credit facilities have been set up by the IMF?
What are the major problems facing the world today? What is being proposed to solve them?
What are the characteristics of a good international monetary system? How can an international monetary system be evaluated?
How was adjustment to balance‐of‐payments disequilibria under the gold standard explained by Hume? How did adjustment actually take place under the gold standard?
What type of international monetary system operated from 1920 to 1924? What happened between 1925 and 1931? What happened after 1931?

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