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Absorption Approach(MCQS)

International Monetary Economics (Royal Melbourne Institute of Technology)

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THE ABSORPTION APPROACH

1. The absorption approach

(a) Ignores the income effect.
(b) Incorporates the financial account.
(c) Ignores the income effect and the financial account.
(d) None of the above.

2. According to the absorption approach, a reduction in the value of the domestic currency
(a) Will improve the trade balance through a decrease in income and output if the
economy is above full employment.
(b) Will improve the trade balance through an increase in income and output if the
economy is above full employment.
(c) May improve the trade balance through an increase in direct absorption.
(d) May improve the trade balance through a reduction in direct absorption.

3. A reduction in the value of the domestic currency for an economy below full employment
(a) Will result in an increase in indirect absorption.
(b) Will result in a decrease in indirect absorption.
(c) Will lead to a trade balance improvement larger than the full exogenous increase in
net exports.
(d) Will lead to a trade balance deterioration larger than the full exogenous decrease in
net exports.

4. According to the terms of trade effect a reduction in the value of the domestic currency
(a) Will increase real income if we are below full employment and net exports increase.
(b) Will lead to an increase in savings and hence an improvement in the trade balance.
(c) Will lead to a reduction in savings and hence a deterioration in the trade balance.
(d) Will lead to a reduction in savings and hence an improvement in the trade balance.

5. In the absorption approach, the trade balance can only worsen if output
(a) Increases relative to absorption.
(b) Decreases relative to absorption.
(c) Does not change relative to absorption.
(d) None of the above.

6. According to the absorption approach, a reduction in the value of the domestic currency for
an economy below full employment
(a) Will lead to a trade balance improvement smaller than the full exogenous increase in
net exports.
(b) Will lead to a trade balance deterioration smaller than the full exogenous decrease in
net exports.
(c) Will lead to a trade balance improvement larger than the full exogenous increase in
net exports.
(d) Will lead to a trade balance deterioration larger than the full exogenous decrease in
net exports.

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