Contemporary Economic Issues
Exam Solutions
Course Introduction
This course examines the critical economic challenges and debates shaping todays world, such as globalization, income inequality, unemployment, technological disruption, climate change, and government policy responses. Students will explore these topics through case studies, empirical data, and theoretical frameworks, developing an understanding of how economic decisions impact societies at local, national, and global levels. The course fosters analytical thinking and equips students to critically assess current economic issues from multiple perspectives, preparing them to engage thoughtfully in public discourse and policy evaluation.
Recommended Textbook
Economics 4th Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) How are the fundamental economic decisions determined in North Korea?
A) Individuals, firms, and the government interact in a market to make these economic decisions.
B) These decisions are made by the country's elders who have had much experience in answering these questions.
C) The government decides because North Korea is a centrally planned economy.
D) The United Nations decides because North Korea is a developing economy.
Answer: C
Q2) The sales revenue a seller receives from the sale of an additional unit of goods is called the marginal benefit.
A)True
B)False
Answer: True
Q3) Microeconomics is the study of
A) how households and firms make choices.
B) the economy as a whole.
C) the global economy.
D) topics such as unemployment, inflation, and economic growth.
Answer: A
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Page 3
Chapter
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Sample Questions
Q1) Increasing opportunity cost is represented by a ________ production possibilities frontier.
A) linear
B) bowed in C) bowed out
D) vertical
Answer: C
Q2) What is meant by the term "free market"?
Answer: A free market is a market with few government restrictions on how a good or service can be produced or sold or on how factors of production can be employed.
Q3) A decrease in the unemployment rate may be represented as a movement from a point on the production possibilities frontier to a point outside the frontier.
A)True
B)False
Answer: False
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Refer to Figure 3-8.The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D<sub>1</sub> and S<sub>1</sub> (point A) If the price of oranges, a substitute for apples, decreases and the wages of apple workers increase, how will the equilibrium point change?
A) The equilibrium point will move from A to E.
B) The equilibrium point will move from A to B.
C) The equilibrium point will move from A to C.
D) The equilibrium will first move from A to B, then return to A.
Answer: A
Q2) Which of the following would cause a decrease in the supply of milk?
A) an increase in the price of cookies (assuming that milk and cookies are complements)
B) a decrease in the price of milk
C) an increase the price of a product that producers sell instead of milk
D) an increase in the number of firms that produce milk
Answer: C
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5
Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Sample Questions
Q1) Refer to Figure 4-5.What is the value of consumer surplus after the imposition of the ceiling?
A) $120,000
B) $230,000
C) $270,000
D) $430,000
Q2) Economists have shown that the burden of a tax is the same whether the tax is collected from the buyer or the seller.Why,then,are gasoline and cigarette taxes imposed on sellers?
A) Sellers are more honest than buyers.
B) The demand for both gasoline and cigarettes is very elastic.
C) The Equal Protection Clause of the U.S. Constitution prohibits the government from imposing taxes like these on buyers.
D) It is more difficult for buyers to keep track of their purchases, and for the government to verify that the right of amount of tax revenue is collected.
Q3) Refer to Figure 4-7 which shows the market for vitamins.Suppose the government imposes a price ceiling of Pv.How will the price ceiling affect the quantity supplied,quantity demanded and quantity exchanged?
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Chapter 5: Externalities, environmental Policy, and Public Goods
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Sample Questions
Q1) Suppose a tax equal to the value of the marginal external cost at the optimal output is imposed on a pollution generating good.All of the following will result from the tax except
A) an increase in the equilibrium market price.
B) a decrease in the equilibrium quantity produced and consumed.
C) a decrease in market supply of the good.
D) an increase in the demand for the good.
Q2) Overuse of a common resource may be avoided by all of the following methods except
A) charging for the use of a common resource.
B) issuing tradable permits for the use of a common resource.
C) government taking over ownership of all private common resources.
D) setting quotas or legal limits on the quantity consumed of the common resource.
Q3) Refer to Figure 5-3.The efficient output level is
A) Qm.
B) Qn.
C) Qo.
D) Qo - Qm.
Q4) How does a negative externality in production reduce economic efficiency?
Page 7
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Chapter 6: Elasticity: The Responsiveness of Demand and Supply
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Sample Questions
Q1) The demand for most farm products is relatively inelastic.All else constant,what is the effect on farm revenues as a result of the introduction of new and better farm equipment which increases in productivity?
A) Farm revenues increase.
B) Farm revenues decrease.
C) Farm revenues remain constant because consumers will not increase their consumption of farm products by much.
D) Farm revenues could increase or decrease depending on the cost of this new equipment.
Q2) Refer to Table 6-2.Which of the following statements is correct?
A) The publisher's analysis is correct only if the demand is perfectly elastic.
B) The publisher's analysis is correct only if the demand is elastic.
C) The publisher's analysis is correct only if the demand is perfectly inelastic.
D) The publisher's analysis is correct only if the demand is unit-elastic.
Q3) Explain the economic concept of price elasticity of supply.How is price elasticity of supply calculated?
Q4) Explain the relationship between price elasticity of demand and total revenue.
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Chapter 7: The Economics of Health Care
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Sample Questions
Q1) The Patient Protection and Affordable Care Act (PPACA)is scheduled to be fully implemented by 2019,at which point
A) current budget cuts are expected to have completely offset the cost of the program.
B) more than 30 million additional individuals are expected to have health care coverage.
C) all hospitals in the United States will be taken over by the federal government.
D) private health insurance companies will no longer exist in the United States.
Q2) On average,people in the United States spend a greater percentage of their income on health care than do people in most other countries.
A)True
B)False
Q3) By the year 2019,health care's share of gross domestic product in the United States is projected to
A) return to its 1995 level.
B) have declined to only 6.5 percent.
C) be more than three times as high as it was in 1965.
D) reach a level of 75 percent.
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Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) Southwest Airlines wants to raise $20 million to finance the renovation of their corporate offices,and the company wishes to raise the funds through direct finance.Which of the following methods could it use?
A) It could issue $20 million in stocks.
B) It could sell $20 million in bonds.
C) It could borrow $20 million from a bank.
D) It could choose either A or B.
Q2) The existence of the principal-agent problem
A) increases the risk of buying stock in a corporation.
B) increases the risk of becoming the sole proprietor of a business.
C) implies that managers that have the same incentives as the board of directors.
D) does all of the above.
Q3) How do unlimited and limited liability differ?
Q4) In a typical year,________ of new jobs are created by small firms.
A) less than 5 percent
B) 10 percent
C) 40 percent
D) 75 percent
Q5) What is the difference between explicit and implicit costs?
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) Refer to Figure 9-3.What is the area of consumer surplus after the imposition of the quota?
A) A + G + H
B) G + H + E + I+ J + M
C) G + H
D) A
Q2) ________ is the ability of an individual,a firm,or a country to produce a good or service at a lower opportunity cost than competitors.
A) Absolute advantage
B) Specialization
C) Autarky
D) Comparative advantage
Q3) Imposing tariffs in cases of dumping
A) is allowed under the WTO agreement.
B) is not allowed under the WTO agreement.
C) is not addressed by the WTO agreement.
D) has never occurred, even though it is allowed under the WTO agreement.
Q4) One of the main sources of comparative advantage is internal economies.
A)True
B)False
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) Gowri has $6 per day to purchase lunch.She spends all of her lunch money on pizza and iced-tea.The price of pizza is $2.00 per slice and iced-tea costs $1 per bottle.
a.Draw Gowri's budget constraint and label it BC<sub>0</sub>.Put pizza on the horizontal axis and iced-tea on the vertical axis.Be sure to identify the intercept values.
b.If the price of iced-tea rises to $1.20 per bottle,show what will happen to her budget constraint in your diagram.Be sure to indicate any new intercept values.
Q2) List three reasons why demand for a product will often increase if the product is endorsed by a celebrity.
Q3) When the price of summer tank tops falls and you buy more of them because they are relatively less expensive,this is called
A) the substitution effect.
B) the income effect.
C) the deadweight loss effect.
D) the elasticity effect.
Q4) What must be true in terms of the income effect,the substitution effect,and the type of good for the good's demand curve to be upward sloping?
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Page 12
Chapter 11: Technology, production, and Costs
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Sample Questions
Q1) An isoquant shows
A) the combinations of two goods that yield the same total satisfaction.
B) the combinations of two inputs that yield the same total product.
C) the combinations of two inputs that cost the same total quantity of money.
D) the combination of two goods that cost the same amount of money.
Q2) Red Stone Creamery currently hires 5 workers.When it added a 6th worker,its output actually fell.Which of the following statements is true?
A) The marginal product of the sixth worker must be negative.
B) The average product of the sixth worker is negative.
C) The sixth worker is not as skilled as the fifth worker.
D) The total product becomes negative.
Q3) Vipsana's Gyros House sells gyros.The cost of ingredients (pita,meat,spices,etc.)to make a gyro is $2.00.Vipsana pays her employees $60 per day.She also incurs a fixed cost of $120 per day.Calculate Vipsana's variable cost per day when she produces 50 gyros using two workers?
A) $100
B) $124.40
C) $220
D) $240
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Page 13
Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) In the short run,if price falls below a firm's minimum average total cost,the firm should shut down.
A)True B)False
Q2) Assume that price is greater than average variable cost.If a perfectly competitive seller is producing at an output where price is $11 and the marginal cost is $14.54,then to maximize profits the firm should
A) continue producing at the current output.
B) produce a larger level of output.
C) produce a smaller level of output.
D) There is not enough information given to answer the question.
Q3) For a perfectly competitive firm,which of the following is not true at profit maximization?
A) Market price is greater than marginal cost.
B) Marginal revenue equals marginal cost.
C) Total revenue minus total cost is maximized.
D) Price equals marginal cost.
Q4) A perfectly competitive firm's marginal revenue curve is downward sloping. A)True B)False
Page 14
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Chapter 13: Monopolistic Competition: The Competitive
Model in a More Realistic Setting
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Sample Questions
Q1) Firms such as Caribou Coffee and Diedrich Coffee operate hundreds of coffeehouses nationwide while firms such as Dunn Brothers Coffee operate only in four states.How would you characterize these stores?
A) Caribou Coffee and Diedrich Coffee are oligopolists while Dunn Brothers is a monopolistic competitor.
B) Caribou Coffee and Diedrich Coffee are duopolists while Dunn Brothers is a monopolistic competitor.
C) Caribou Coffee and Diedrich Coffee are duopolists while Dunn Brothers is an oligopolist
D) They are all monopolistic competitors.
Q2) Which of the following is a disadvantage of trademarking a firm's product?
A) A trademark differentiates a firm's product.
B) A trademark conveys information about the product to the public.
C) A trademark may become so widely used to denote a particular type of product that the trademark may no longer be a legally protected brand name.
D) A trademark does not affect demand for the firm's product.
Q3) What is the difference between the terms "marketing" and "advertising"?
Q4) What is the difference between zero accounting profit and zero economic profit?
Page 15
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) Refer to Figure 14-2.If the government delays Gigacom's entry and Xenophone moves first,what is the likely outcome in the market?
A) Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million.
B) Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million.
C) Xenophone offers DSL internet service and earns a profit of $5 million while Gigacom offer internet service via cable line and earns a profit of $6.5 million.
D) Xenophone offers internet service via cable line and earns a profit of $4 million while Gigacom offers DSL internet service and earns a profit of $4.5 million.
Q2) An oligopolistic industry is characterized by all of the following except A) existence of entry barriers.
B) the possibility of reaping long run economic profits.
C) firms pursuing aggressive business strategies, independent of rivals' strategies. D) production of standardized products.
Q3) Explain why OPEC is caught in a prisoner's dilemma?
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Chapter 15: Monopoly and Antitrust Policy
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Sample Questions
Q1) If a firm's average total cost is less than price where MR=MC,
A) the firm should shut down.
B) the firm should raise its price.
C) the firm should continue to produce the output it is producing.
D) the firm should cut back on its output to lower its cost.
Q2) Refer to Table 15-1.What is the firm's profit-maximizing output and what is the price charged to sell this output?
A) P = $85; Q = 10
B) P = $80; Q = 11
C) P = $70; Q = 13
D) P = $65; Q = 14
Q3) Why does a monopoly cause a deadweight loss?
A) because it does not produce some output for which marginal benefit exceeds marginal cost
B) because it appropriates a portion of consumer surplus for itself
C) because it increases producer surplus at the expense of consumer surplus
D) because it does not produce some output for which demand exceeds supply
Q4) Suppose that a perfectly competitive industry becomes a monopoly.What effect will this have on consumer surplus,producer surplus,and deadweight loss?
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Chapter 16: Pricing Strategy
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Sample Questions
Q1) Refer to Figure 16-2.What is the price charged in the two markets?
A) price in the student market = price in the non-student market = P<sub>a</sub>
B) price in the student market = price in the non-student market = P<sub>b</sub>
C) price in the student market = P<sub>d</sub>; price in the non-student market = P<sub>e</sub>
D) price in the student market = P<sub>c</sub>; price in the non-student market = P<sub>e</sub>
Q2) Refer to Figure 16-4.Suppose the firm represented in the diagram decides to use a two-part pricing strategy such that it charges a fixed fee and a per-unit price equal to the monopoly price.What is the revenue collected from the fixed fee portion of the price?
A) $10,240
B) $7,870
C) $2,560
D) $1,440
Q3) If a firm could practice perfect price discrimination,it would
A) allow resale of its product.
B) charge every buyer a different price.
C) charge a price based on the quantity of a product bought.
D) use odd pricing.
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Page 18
Chapter 17: The Markets for Labor and Other Factors of Production
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Q1) Let MP = marginal product,P = output price,and W = wage,then the equation that represents the condition where a competitive firm would hire another worker is
A) P × MP = W.
B) P × MP < W.
C) P × MP > W.
D) P × W > MP.
Q2) When workers are paid on a piece-rate basis,an employer must be able to easily measure each worker's output.
A)True
B)False
Q3) An increase in the wage rate causes
A) a rightward shift of the firm's labor demand curve.
B) a leftward shift of the firm's labor demand curve.
C) a decrease in the quantity of labor demanded.
D) an increase in labor's marginal productivity.
Q4) A profit-maximizing firm should hire workers up to the point where labor's marginal revenue product equals the wage rate.
A)True
B)False
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Chapter 18: Public Choice, taxes, and the Distribution of Income
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Q1) Consider a public good such as fire protection services.Rich people may benefit more than the poor from such a service because rich people stand to lose more from a fire that destroys property.In this case,
A) the ability-to-pay principle may support the rich paying more taxes than the poor, but not the benefits-received principle.
B) the benefits-received principle may support the rich paying more taxes than the poor, but not the ability-to-pay principle.
C) both the benefits-received and the ability-to-pay principles may support the rich paying more taxes than the poor.
D) neither the benefits-received nor the ability-to-pay principles may support the rich paying more taxes than the poor.
Q2) If the marginal tax rate is equal to the average tax rate as taxable income increases,the tax structure is
A) regressive.
B) proportional.
C) progressive.
D) unfair.
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Page 20
Chapter 19: GDP: Measuring Total Production and Income
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Sample Questions
Q1) In the term "real GDP," what does "GDP" stand for and what does it measure? What does "real" indicate?
Q2) The output of Mexican citizens who work in Texas would be included in the
A) gross domestic product of Mexico.
B) gross national product of Mexico.
C) gross national product of the United States.
D) net national product of the United States.
Q3) Suppose that in 2011,the national income in the United States was $200 billion,depreciation was $15 billion,personal taxes were $20 billion,and transfer payments were $10 billion.Gross domestic product in 2011 is
A) $185 billion.
B) $215 billion.
C) $220 billion.
D) $245 billion.
Q4) Investment,as defined by economists,would include the purchase of a A) corporate bond.
B) government bond.
C) share of stock in ExxonMobil.
D) computer by an accounting firm.
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Chapter 20: Unemployment and Inflation
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Q1) According to the text,economists consider full employment to occur when A) everyone who wants a job has a job.
B) frictional unemployment equals zero.
C) the sum of frictional unemployment and structural unemployment equals zero.
D) the unemployment rate consists of only frictional and structural unemployment.
Q2) The increased generosity of unemployment insurance programs in Canada as compared to the United States should A) decrease the duration of unemployment in Canada as compared to the United States.
B) increase the duration of unemployment in Canada as compared to the United States.
C) have no impact on the duration of unemployment in Canada.
D) raise the duration of unemployment in the United States.
Q3) The percent increase in the CPI from one year to the next is a measure of the A) GDP deflator.
B) unemployment rate.
C) real interest rate.
D) inflation rate.
Q4) Describe how inflation can be costly even if it is anticipated.
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Page 22
Chapter 21: Economic Growth, the Financial System, and Business Cycles
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Sample Questions
Q1) In an open economy,there is interaction with other economies in terms of both trading of goods and services and borrowing and lending.
A)True
B)False
Q2) Economist Robert Fogel has estimated that by the year 2040,individuals in the United States will be spending
A) more time in the workforce and more time in leisure activities than they do today.
B) less time in the workforce and less time in leisure activities than they do today.
C) less time in the workforce and more time in leisure activities than they do today.
D) more time in the workforce and less time in leisure activities than they do today.
Q3) Technological advances generally result in
A) decreased incomes.
B) increased life expectancy.
C) increased infant mortality rates.
D) increased average number of hours worked per day.
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Chapter 22: Long-Run Economic Growth: Sources and Policies
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Q1) Which of the following can explain why some countries have not experienced relatively high growth rates in real GDP per capita despite relatively low initial levels of real GDP per capita?
A) Many of these developing countries do not have a functioning court system that can enforce laws.
B) Countries that are relatively poor are more likely to experience wars and revolutions.
C) Countries that are relatively poor are likely to have a lower quality of health care.
D) all of the above
Q2) The opportunity cost of being unemployed tends to be the highest in which of the following countries?
A) Canada
B) the United States
C) France
D) the United Kingdom
Q3) Explain how market economies are generally better able to achieve technological progress than are centrally planned economies.
Q4) How do government policies that enforce property rights affect economic growth?
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Chapter 23: Aggregate Expenditure and Output in the Short Run
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Q1) Equilibrium GDP is equal to
A) autonomous expenditure times the marginal propensity to consume.
B) autonomous expenditure times the marginal propensity to save.
C) autonomous expenditure times the multiplier.
D) autonomous expenditure.
Q2) If the multiplier is 5,the marginal propensity to consume must be 0.8.
A)True
B)False
Q3) Suppose the United States experiences a long period of inflation relative to other countries.How will this affect U.S.net exports?
Q4) Refer to Table 23-2.Given the consumption schedule in the table above,the marginal propensity to save is
A) 0.1.
B) 0.4.
C) 0.7.
D) 0.9.
Q5) If aggregate expenditure is more than GDP,then inventories fall and GDP rises.
A)True
B)False
Page 25
Q6) Why do economists care about aggregate expenditures?
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Chapter 24: Aggregate Demand and Aggregate Supply Analysis
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Q1) Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP.Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?
A) Output will decrease.
B) Prices will increase.
C) Unemployment will rise.
D) Short-run aggregate supply will shift to the right.
Q2) Refer to Figure 24-1.Ceteris paribus,an increase in interest rates would be represented by a movement from
A) AD<sub>1</sub> to AD<sub>2</sub>.
B) AD<sub>2</sub> to AD<sub>1</sub>.
C) point A to point B.
D) point B to point A.
Q3) Refer to Figure 24-4.Given the economy is at point A in year 1,what will happen to the unemployment rate in year 2?
A) It will rise.
B) It will fall.
C) It will remain constant.
D) not enough information to answer the question
Page 27
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Chapter
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Q1) In countries that have experienced hyperinflation,what role have large government budget deficits played in causing the very high inflation rates?
Q2) As recently as 2007,the amount of seigniorage on a U.S.penny is ________,and the amount of seigniorage U.S.paper fiat money is ________.
A) positive; negative
B) negative; zero
C) negative; positive
D) zero; positive
Q3) The more excess reserves banks choose to keep,
A) the larger the deposit multiplier.
B) the smaller the deposit multiplier.
C) the higher the required reserve ratio.
D) the lower the required reserve ratio.
Q4) In economics,money is defined as
A) the total value of one's assets in current prices.
B) the total value of one's assets minus the total value of one's debts, in current prices.
C) the total amount of salary, interest, and rental income earned during a year.
D) any asset people generally accept in exchange for goods and services.
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Chapter 26: Monetary Policy
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Sample Questions
Q1) By the height of the housing bubble in 2005 and early 2006,lenders had greatly loosened the standards for obtaining a mortgage loan,with many mortgages being granted to ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes.
A) sub-prime; "Alt-A"
B) adjustable rate; shadow-banking
C) "credit crunch"; black market
D) "fresh-start"; prime rate
Q2) Using the money demand and money supply model,show and explain why the Federal Reserve cannot achieve a target for both the money supply and an interest rate.
Q3) The supporters of a monetary growth rule believe that active monetary policy
A) stabilizes the economy, decreasing the number of recessions and their severity.
B) destabilizes the economy, increasing the number of recessions and their severity.
C) cannot change the inflation rate.
D) cannot change real GDP.
Q4) What actions should the Fed take if it believes the economy is about to fall into recession?
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Chapter 27: Fiscal Policy
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Sample Questions
Q1) The government purchases multiplier will be larger if the marginal income tax rate decreases.
A)True
B)False
Q2) The budget deficit increases during wars and recessions.
A)True
B)False
Q3) Refer to Figure 27-3.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,Congress and the president would most likely pursue
A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) expansionary monetary policy.
D) contractionary monetary policy.
E) expansionary automatic stabilizers.
Q4) An increase in government purchases will increase aggregate demand because
A) government expenditures are a component of aggregate demand.
B) consumption expenditures are a component of aggregate demand.
C) the decline in the price level will increase demand.
D) the decline in the interest rate will increase demand.
30
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Chapter 28: Inflation, unemployment, and Federal Reserve Policy
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Sample Questions
Q1) The natural rate of unemployment is the rate that exists when the economy is producing at potential GDP.
A)True
B)False
Q2) If inflationary expectations on the part of the public increase,the trade-off between inflation and unemployment becomes worse.
A)True
B)False
Q3) Refer to Figure 28-4.A follower of the new classical macroeconomics would argue that a contractionary monetary policy to lower inflation after a supply shock,like that pursued by Volcker in 1979,would result in a movement from ________.
A) A to D to C
B) A to B
C) C to D to A
D) C to A
E) A to C
Q4) If firms and workers have adaptive expectations,what impact will expansionary monetary policy have on inflation,unemployment,and the Phillips curve?
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Chapter 29: Macroeconomics in an Open Economy
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Sample Questions
Q1) Which of the following is an example of foreign direct investment in China?
A) U.S. auto entrepreneur Carroll Shelby buys stock in the Chinese auto company, Chevy Automobile Company.
B) Chinese Shenzen Airlines company buys a small U.S. midwest airline company, Air Chicago.
C) The U.S. company Wal-Mart buys a warehouse in Shanghai.
D) The bank of China purchases U.S. Treasury bonds.
E) A U.S. foreign exchange speculator buys $200,000 worth of the Chinese currency the yuan.
Q2) The saving and investment equation holds only when the federal budget is balanced.
A)True
B)False
Q3) What two measures of macroeconomic activity are often referred to as the "twin deficits"?
A) net capital flows and net exports
B) the foreign exchange deficit and net foreign investment
C) the budget deficit and the trade balance
D) the saving-investment deficit and the export deficit
Q4) Why is the balance of payments always zero?
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Chapter 30: The International Financial System
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Sample Questions
Q1) Why did the United States abandon the gold standard in the 1930s?
A) The government wanted to rapidly expand the money supply in response to the Great Depression.
B) The government wanted to move away from a floating exchange rate system to a fixed exchange rate system.
C) The Treasury Department in the United States found it was cheaper to print paper money instead of gold coins.
D) New sources of gold were discovered, so the price of gold plummeted, dramatically reducing the value of the dollar.
Q2) Explain why international capital markets have expanded since the 1980s.
Q3) South Korea,Indonesia,Malaysia,and Thailand all pegged their currencies to the dollar at one point in time.Because some of these currencies were overvalued at the pegged rate,speculators anticipated these countries would abandon the peg and speculators began selling those currencies.Explain how this speculation would affect the ability of a country to maintain a pegged exchange rate.
Q4) Why are foreign investors more likely to invest in U.S.government bonds than in U.S.corporate stocks and bonds?
Q5) Why might a country raise interest rates in the face of an exchange rate crisis?
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