Question 1

The real exchange rate, q, is defined as

Accepted Answer

A)  the price of the foreign basket in terms of the domestic one. 
B)  the price of the domestic basket in terms of the foreign one. 
C)  the price of the foreign basket. 
D)  the price of the domestic basket. 
E)  the nominal exchange rate in terms of the domestic basket. 
A)  the price of the foreign basket in terms of the domestic one. 
B)  the price of the domestic basket in terms of the foreign one. 
C)  the price of the foreign basket. 
D)  the price of the domestic basket. 
E)  the nominal exchange rate in terms of the domestic basket.

Question 2

In the short run, any rise in the real exchange rate, EP   /P, will cause

Accepted Answer

A)  an upward shift in the aggregate demand function and a reduction in output. 
B)  an upward shift in the aggregate demand function and an expansion of output. 
C)  a downward shift in the aggregate demand function and an expansion of output. 
D)  an downward shift in the aggregate demand function and a reduction in output. 
E)  an upward shift in the aggregate demand function but leaves output intact. 
A)  an upward shift in the aggregate demand function and a reduction in output. 
B)  an upward shift in the aggregate demand function and an expansion of output. 
C)  a downward shift in the aggregate demand function and an expansion of output. 
D)  an downward shift in the aggregate demand function and a reduction in output. 
E)  an upward shift in the aggregate demand function but leaves output intact.

Question 3

In the short run

Accepted Answer

A)  monetary expansion causes the CA to increase and fiscal expansion causes the CA to decrease. 
B)  monetary expansion causes the CA to decrease and fiscal expansion causes the CA to decrease. 
C)  monetary expansion causes the CA to increase and fiscal expansion causes the CA to increase. 
D)  monetary expansion causes the CA to decrease and fiscal expansion causes the CA to increase. 
E)  monetary expansion causes the CA to increase and the effects of fiscal expansion are ambiguous. 
A)  monetary expansion causes the CA to increase and fiscal expansion causes the CA to decrease. 
B)  monetary expansion causes the CA to decrease and fiscal expansion causes the CA to decrease. 
C)  monetary expansion causes the CA to increase and fiscal expansion causes the CA to increase. 
D)  monetary expansion causes the CA to decrease and fiscal expansion causes the CA to increase. 
E)  monetary expansion causes the CA to increase and the effects of fiscal expansion are ambiguous.

Question 4

Find the real exchange rate for the following case: Assume that the representative basket of European goods and services costs 40 euros and the representative U.S. basket costs $50, and the dollar/euro exchange rate is $0.90 per euro, then the price of the European basket in terms of U.S. basket is ________.

Accepted Answer

[(0.9 $/euro) (40 eu

Question 5

Which one of the following statements is MOST accurate?

Accepted Answer

A)  In the long run, foreign output depends only on the available domestic supplies of factors of production. 
B)  In the short run, domestic output depends only on the available domestic supplies of factors of production. 
C)  In the long run, domestic output depends only on the available domestic supplies of factors of production. 
D)  In the long run and in the short run, domestic output depends only on the available domestic supplies of factors of production. 
E)  In the long run, domestic output depends only on the real exchange rate. 
A)  In the long run, foreign output depends only on the available domestic supplies of factors of production. 
B)  In the short run, domestic output depends only on the available domestic supplies of factors of production. 
C)  In the long run, domestic output depends only on the available domestic supplies of factors of production. 
D)  In the long run and in the short run, domestic output depends only on the available domestic supplies of factors of production. 
E)  In the long run, domestic output depends only on the real exchange rate.

Question 6

The J-curve illustrates which of the following?

Accepted Answer

A)  the effects of depreciation on the home country's economy 
B)  the immediate increase in current account caused by a currency depreciation 
C)  the gradual adjustment of home prices to a currency depreciation 
D)  the short-term effects of depreciation on the current account 
E)  the Keynesian view of international trade dynamics 
A)  the effects of depreciation on the home country's economy 
B)  the immediate increase in current account caused by a currency depreciation 
C)  the gradual adjustment of home prices to a currency depreciation 
D)  the short-term effects of depreciation on the current account 
E)  the Keynesian view of international trade dynamics

Question 7

The unique equilibrium output level in the short run is found at the intersection of the following curves.

Accepted Answer

A)  aggregate demand and aggregate supply 
B)  aggregate demand and 45 degree line 
C)  aggregate supply and 45 degree line 
D)  aggregate demand and short-run aggregate supply 
E)  aggregate supply and long-run demand 
A)  aggregate demand and aggregate supply 
B)  aggregate demand and 45 degree line 
C)  aggregate supply and 45 degree line 
D)  aggregate demand and short-run aggregate supply 
E)  aggregate supply and long-run demand

Question 8

Why does an exchange rate-output combination lying above both DD and AA jump first to AA in equilibrium?

Accepted Answer

A)  Asset prices can adjust immediately. 
B)  Production plans can adjust immediately. 
C)  to preserve full employment 
D)  Prices are nominal and demand is real. 
E)  Aggregate demand adjusts faster than output. 
A)  Asset prices can adjust immediately. 
B)  Production plans can adjust immediately. 
C)  to preserve full employment 
D)  Prices are nominal and demand is real. 
E)  Aggregate demand adjusts faster than output.

Question 9

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by a depreciation of domestic currency, all else equal. 
B)  For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by a depreciation of foreign currency, all else equal. 
C)  For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by an appreciation of domestic currency, all else equal. 
D)  For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of domestic currency, all else equal. 
E)  For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of foreign currency, all else equal. 
A)  For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by a depreciation of domestic currency, all else equal. 
B)  For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by a depreciation of foreign currency, all else equal. 
C)  For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by an appreciation of domestic currency, all else equal. 
D)  For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of domestic currency, all else equal. 
E)  For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of foreign currency, all else equal.

Question 10

A naïve implication of the DD-AA framework is that either fiscal or monetary policy can lead to full employment. Discuss why this view is naïve.

Accepted Answer

(1) Inflation may arise without any gain

Question 11

If an economy is in a liquidity trap, then the nominal interest rate is ________ and the only effective policy that can be used to stimulate the economy is ________.

Accepted Answer

A)  zero or negative; expansionary fiscal policy 
B)  zero or negative; expansionary monetary policy 
C)  high and rising; contractionary monetary policy 
D)  high and rising; expansionary monetary policy 
E)  high and rising; expansionary fiscal policy 
A)  zero or negative; expansionary fiscal policy 
B)  zero or negative; expansionary monetary policy 
C)  high and rising; contractionary monetary policy 
D)  high and rising; expansionary monetary policy 
E)  high and rising; expansionary fiscal policy

Question 12

Explain how does a rise in real income affect aggregate demand?

Accepted Answer

A rise in domestic real income, Y, leads

Question 13

Explain what are the factors that shift the DD Schedule.

Accepted Answer

A change in government demand, change in

Question 14

A real depreciation of a nation's currency gives rise to the ________ effect and the ________ effect on the current account.

Accepted Answer

A)  volume; value 
B)  depletion; expansion 
C)  surplus; deficit 
D)  output; trade 
E)  price; profit 
A)  volume; value 
B)  depletion; expansion 
C)  surplus; deficit 
D)  output; trade 
E)  price; profit

Question 15

Which one of the following statements is MOST accurate?

Accepted Answer

A)  Factors of production can only be over-employed in the short run. 
B)  Factors of production can only be under-employed in the short run. 
C)  Factors of production can be over- or under-employed in the long run. 
D)  Factors of production can be over- or under-employed in the short run. 
E)  Factors of production are fully employed in the short run. 
A)  Factors of production can only be over-employed in the short run. 
B)  Factors of production can only be under-employed in the short run. 
C)  Factors of production can be over- or under-employed in the long run. 
D)  Factors of production can be over- or under-employed in the short run. 
E)  Factors of production are fully employed in the short run.

Question 16

The Marshall-Lerner condition holds that a country's current account balance will ________ in response to a real ________ in a nation's currency if the________.

Accepted Answer

A)  improve; depreciation; sum of the price elasticities of export and import demand exceeds 1 
B)  worsen; depreciation; sum of the price elasticities of export and import demand exceeds 1 
C)  improve; appreciation; sum of the price elasticities of export and import demand exceeds 1 
D)  improve; appreciation; sum of the price elasticities of export and import demand exceeds 0 
E)  worsen; depreciation; sum of the price elasticities of export and import demand exceeds 0 
A)  improve; depreciation; sum of the price elasticities of export and import demand exceeds 1 
B)  worsen; depreciation; sum of the price elasticities of export and import demand exceeds 1 
C)  improve; appreciation; sum of the price elasticities of export and import demand exceeds 1 
D)  improve; appreciation; sum of the price elasticities of export and import demand exceeds 0 
E)  worsen; depreciation; sum of the price elasticities of export and import demand exceeds 0

Question 17

The DD schedule shows all combinations of which 2 variables so that the output market is in equilibrium?

Accepted Answer

A)  imports and exports 
B)  exports and the exchange rate 
C)  foreign prices and the exchange rate 
D)  output and the exchange rate 
E)  output and exports 
A)  imports and exports 
B)  exports and the exchange rate 
C)  foreign prices and the exchange rate 
D)  output and the exchange rate 
E)  output and exports

Question 18

Imagine that the economy is at a point that is below both AA and DD, where both the output and asset markets are out of equilibrium. Which first action is TRUE?

Accepted Answer

A)  The economy will stay at this level in the short run. 
B)  The exchange rate will first rise to a point on the AA schedule. 
C)  The exchange rate will first rise to a point on the DD schedule. 
D)  The AA-DD equilibrium will shift to the position of the economy. 
E)  The output level will first increase to a position on the DD schedule. 
A)  The economy will stay at this level in the short run. 
B)  The exchange rate will first rise to a point on the AA schedule. 
C)  The exchange rate will first rise to a point on the DD schedule. 
D)  The AA-DD equilibrium will shift to the position of the economy. 
E)  The output level will first increase to a position on the DD schedule.

Question 19

Which statement best describes the current account balance in the short run?

Accepted Answer

A)  Monetary expansion lowers the current account balance. 
B)  Monetary expansion keeps the current account balance the same. 
C)  Fiscal expansion increases the current account balance. 
D)  Fiscal expansion keeps the current account balance the same. 
E)  Monetary expansion increases the current account balance. 
A)  Monetary expansion lowers the current account balance. 
B)  Monetary expansion keeps the current account balance the same. 
C)  Fiscal expansion increases the current account balance. 
D)  Fiscal expansion keeps the current account balance the same. 
E)  Monetary expansion increases the current account balance.

Question 20

Fill in the following table.

Accepted Answer

The answer of Fill in the following table.  ...

Exam 17: Output and the Exchange Rate in the Short Run

The real exchange rate, q, is defined as

In the short run, any rise in the real exchange rate, EP /P, will cause

In the short run

Which one of the following statements is MOST accurate?

The J-curve illustrates which of the following?

The unique equilibrium output level in the short run is found at the intersection of the following curves.

Why does an exchange rate-output combination lying above both DD and AA jump first to AA in equilibrium?

Which one of the following statements is the MOST accurate?

A naïve implication of the DD-AA framework is that either fiscal or monetary policy can lead to full employment. Discuss why this view is naïve.

If an economy is in a liquidity trap, then the nominal interest rate is ________ and the only effective policy that can be used to stimulate the economy is ________.

Explain how does a rise in real income affect aggregate demand?

Explain what are the factors that shift the DD Schedule.

A real depreciation of a nation's currency gives rise to the ________ effect and the ________ effect on the current account.

Which one of the following statements is MOST accurate?

The Marshall-Lerner condition holds that a country's current account balance will ________ in response to a real ________ in a nation's currency if the________.

The DD schedule shows all combinations of which 2 variables so that the output market is in equilibrium?

Imagine that the economy is at a point that is below both AA and DD, where both the output and asset markets are out of equilibrium. Which first action is TRUE?

Which statement best describes the current account balance in the short run?

Fill in the following table.

Introduction

World Trade: an Overview

Labor Productivity and Comparative Advantage: the Ricardian Model

Specific Factors and Income Distribution

Resources and Trade: the Heckscher-Ohlin Model

The Standard Trade Model

External Economies of Scale and the International Location of Production

Firms in the Global Economy: Export Decisions, Outsourcing, and Multinational Enterprises

The Instruments of Trade Policy

The Political Economy of Trade Policy

Trade Policy in Developing Countries

Controversies in Trade Policy

National Income Accounting and the Balance of Payments

Exchange Rates and the Foreign Exchange Market: an Asset Approach

Money, Interest Rates, and Exchange Rates

Price Levels and the Exchange Rate in the Long Run

Fixed Exchange Rates and Foreign Exchange Intervention

International Monetary Systems: an Historical Overview

Financial Globalization: Opportunity and Crisis

Optimum Currency Areas and the Euro

Developing Countries: Growth, Crisis, and Reform

Filters

If an economy is in a liquidity trap, then the nominal interest rate is and the only effective policy that can be used to stimulate the economy is .

A real depreciation of a nation's currency gives rise to the effect and the effect on the current account.

The Marshall-Lerner condition holds that a country's current account balance will in response to a real in a nation's currency if the.