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The supply-side effects of a devaluation are that it increases 


1. "The floating exchange-rate system has served us well. In recent years, currency flexibility has facilitated adjustment, first to higher inflation, and then to sharp declines in export prices and volumes." The exchange rate first 
a) fell then rose b) rose then fell c) fell then fell again d) rose then rose again 
2. "It is surprising that, with the dollar trading so high, the central bank has not allowed some easing of interest rates at the expense of a weaker dollar. Since North America has entered into recession and exports are falling off, clearly the capacity constraints argument with respect to export industries carries less weight." This is an argument for 
a) following the monetarist rule b) expansionary monetary policy 
c) contractionary monetary policy 
d) exchange rate manipulation through direct intervention in the foreign exchange market 117 
3. "Official intervention in the foreign exchange market does appear to be a useful policy, when overshoots take place in fragile circumstances, he said." How would this intervention work? 
a) capital outflows would be restricted if the exchange rate rises above its equilibrium value 
b) dollars would be sold in the foreign exchange market if the exchange rate rises above its equilibrium value 
c) dollars would be sold in the foreign exchange market if the exchange rate falls below its equilibrium value 
d) dollars would be bought in the foreign exchange market if the exchange rate rises above its equilibrium value 
4. "Reagan's own Council of Economic Advisors put the case for a muscular dollar with surprising force: The strong dollar has stimulated production and investment in sectors less involved in international trade. In other industries, competition from imports has prompted more expenditure in plant and equipment as well as greater attention to controlling wages and other costs. Prices of traded goods and close substitutes have been kept lower than they would have been otherwise, thereby benefiting both U.S. consumers and U.S. producers who use imported inputs." In a nutshell, the argument for a muscular dollar is that it 
a) fights inflation b) cuts down on imports 
c) prevents unemployment d) avoids balance of payments deficits 
5. "Most economists ignore the supply-side effects of exchange rate changes. He thinks the supply-side effects make the impact of a devaluation much less palatable." The supply-side effects of a devaluation are that it increases 
a) costs b) competition c) productivity d) import profitability



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