Question 1

What is the real exchange rate? What is its relationship to the current account?

Accepted Answer

Defined as: EP @#IMG-DLM& /P (the exchange rate mu

Question 2

Which of the following does NOT affect the position of the DD curve?

Accepted Answer

A)  monetary policy 
B)  government spending 
C)  taxes 
D)  export demand 
E)  price levels 
A)  monetary policy 
B)  government spending 
C)  taxes 
D)  export demand 
E)  price levels

Question 3

Discuss the main factors affecting the position of the DD schedule.

Accepted Answer

The level of government demand

Question 4

If consumers experience an decrease in lifetime income, current spending will ________, current saving will ________, and future spending will ________.

Accepted Answer

A)  decrease; decrease; decrease 
B)  increase; decrease; decrease 
C)  increase; decrease; increase 
D)  increase; increase; decrease 
E)  decrease; increase; increase 
A)  decrease; decrease; decrease 
B)  increase; decrease; decrease 
C)  increase; decrease; increase 
D)  increase; increase; decrease 
E)  decrease; increase; increase

Question 5

In the short run, we assume that the money prices of goods and services are

Accepted Answer

A)  temporarily fixed. 
B)  permanently fixed. 
C)  allowed to fluctuate. 
D)  equal to long-run prices. 
E)  fully employed. 
A)  temporarily fixed. 
B)  permanently fixed. 
C)  allowed to fluctuate. 
D)  equal to long-run prices. 
E)  fully employed.

Question 6

Find the real exchange rate for the following case: Assume that the representative basket of European goods costs 150 euros and the representative U.S. basket costs $90, and the dollar/euro exchange rate is $0.80 per euro, then the price of the European basket in terms of U.S. basket is:

Accepted Answer

[(0.80 $/euro) (150 euro per a

Question 7

Which of the following compete to determine whether the current account improves or worsens following a rise in the real exchange rate?

Accepted Answer

A)  appreciation and depreciation 
B)  crowding out effect and producers effect 
C)  volume effect and value effect 
D)  volume effect and inflation 
E)  producers effect and value effect 
A)  appreciation and depreciation 
B)  crowding out effect and producers effect 
C)  volume effect and value effect 
D)  volume effect and inflation 
E)  producers effect and value effect

Question 8

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  A rise in domestic real income raises aggregate demand for home output. 
B)  A rise in domestic real income decreases aggregate demand for home output because of the increase demand for import. 
C)  A rise in domestic real income keeps aggregate demand for home output at the same level. 
D)  It is difficult to tell whether a rise in domestic real income affects positively or negatively aggregate demand for home output. 
E)  A rise in domestic real income decreases aggregate demand for home output because the CA is raised. 
A)  A rise in domestic real income raises aggregate demand for home output. 
B)  A rise in domestic real income decreases aggregate demand for home output because of the increase demand for import. 
C)  A rise in domestic real income keeps aggregate demand for home output at the same level. 
D)  It is difficult to tell whether a rise in domestic real income affects positively or negatively aggregate demand for home output. 
E)  A rise in domestic real income decreases aggregate demand for home output because the CA is raised.

Question 9

Describe a J Curve.

Accepted Answer

The time lag with which real currency de

Question 10

Using the DD-AA framework, show the phenomenon of overshooting. Use a figure to explain when it is taking place.

Accepted Answer

The figure below shows the phenomenon of

Question 11

Current account is given by the equation:

Accepted Answer

A)  CA = IM - EX (measured in terms of domestic output). 
B)  CA = IM - EX (measured in terms of foreign output). 
C)  CA = EX - IM (measured in terms of domestic output). 
D)  CA = EX - IM (measured in terms of foreign output). 
E)  CA = EX + IM (measured in terms of domestic output). 
A)  CA = IM - EX (measured in terms of domestic output). 
B)  CA = IM - EX (measured in terms of foreign output). 
C)  CA = EX - IM (measured in terms of domestic output). 
D)  CA = EX - IM (measured in terms of foreign output). 
E)  CA = EX + IM (measured in terms of domestic output).

Question 12

What is inflation bias? What measures have governments taken to avoid it?

Accepted Answer

Inflation bias is caused when a governme

Question 13

Why is the economy at full employment in the long run?

Accepted Answer

A)  Only wages have the ability to adjust. 
B)  Only price can adjust. 
C)  Prices don't adjust. 
D)  Wages and the price level eventually adjust to full employment equilibrium levels. 
E)  Government policies eventually converge on the full employment strategy. 
A)  Only wages have the ability to adjust. 
B)  Only price can adjust. 
C)  Prices don't adjust. 
D)  Wages and the price level eventually adjust to full employment equilibrium levels. 
E)  Government policies eventually converge on the full employment strategy.

Question 14

Please discuss the volume effect and the value effect in regards to how the current account will move given a change in the real exchange rate.

Accepted Answer

The volume effect takes place when consu

Question 15

A country's domestic currency's real exchange rate, q, is defined as

Accepted Answer

A)  E. 
B)  E times P. 
C)  E times P   . 
D)  (E times P   )/P. 
E)  P/(E times P   ). 
A)  E. 
B)  E times P. 
C)  E times P   . 
D)  (E times P   )/P. 
E)  P/(E times P   ).

Question 16

In the short run, a permanent increase in the domestic money supply causes

Accepted Answer

A)  a greater upward shift in the DD curve than that caused by an equal, but transitory, increase. 
B)  a greater downward shift in the AA curve than that caused by an equal, but transitory, increase. 
C)  a smaller upward shift in the AA curve than that caused by an equal, but transitory, increase. 
D)  a smaller downward shift in the AA curve than that caused by an equal, but transitory, increase. 
E)  a greater upward shift in the AA curve than that caused by an equal, but transitory, increase. 
A)  a greater upward shift in the DD curve than that caused by an equal, but transitory, increase. 
B)  a greater downward shift in the AA curve than that caused by an equal, but transitory, increase. 
C)  a smaller upward shift in the AA curve than that caused by an equal, but transitory, increase. 
D)  a smaller downward shift in the AA curve than that caused by an equal, but transitory, increase. 
E)  a greater upward shift in the AA curve than that caused by an equal, but transitory, increase.

Question 17

The current account balance is

Accepted Answer

A)  the supply of a country's exports less the country's own demand for imports. 
B)  the demand for a country's exports plus the country's own demand for imports. 
C)  the country's own demand for imports less the demand for a country's exports. 
D)  the demand for a country's exports less the country's own demand for imports. 
E)  the country's federal reserves minus the national debt. 
A)  the supply of a country's exports less the country's own demand for imports. 
B)  the demand for a country's exports plus the country's own demand for imports. 
C)  the country's own demand for imports less the demand for a country's exports. 
D)  the demand for a country's exports less the country's own demand for imports. 
E)  the country's federal reserves minus the national debt.

Question 18

What are two ways the government can maintain full employment in an open economy? Also give an example for each.

Accepted Answer

There are two types of government policy

Question 19

Assume the asset market is always in equilibrium. Therefore a fall in Y would result in

Accepted Answer

A)  higher inflation abroad. 
B)  a decreased demand for domestic products. 
C)  a contraction of the money supply. 
D)  a depreciation of the home currency. 
E)  an appreciation of the home currency. 
A)  higher inflation abroad. 
B)  a decreased demand for domestic products. 
C)  a contraction of the money supply. 
D)  a depreciation of the home currency. 
E)  an appreciation of the home currency.

Question 20

Explain the following figure:

Accepted Answer

The figure depicts the effect of a perma

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

What is the real exchange rate? What is its relationship to the current account?

Which of the following does NOT affect the position of the DD curve?

Discuss the main factors affecting the position of the DD schedule.

If consumers experience an decrease in lifetime income, current spending will ________, current saving will ________, and future spending will ________.

In the short run, we assume that the money prices of goods and services are

Find the real exchange rate for the following case: Assume that the representative basket of European goods costs 150 euros and the representative U.S. basket costs $90, and the dollar/euro exchange rate is $0.80 per euro, then the price of the European basket in terms of U.S. basket is:

Which of the following compete to determine whether the current account improves or worsens following a rise in the real exchange rate?

Which one of the following statements is the MOST accurate?

Describe a J Curve.

Using the DD-AA framework, show the phenomenon of overshooting. Use a figure to explain when it is taking place.

Current account is given by the equation:

What is inflation bias? What measures have governments taken to avoid it?

Why is the economy at full employment in the long run?

Please discuss the volume effect and the value effect in regards to how the current account will move given a change in the real exchange rate.

A country's domestic currency's real exchange rate, q, is defined as

In the short run, a permanent increase in the domestic money supply causes

The current account balance is

What are two ways the government can maintain full employment in an open economy? Also give an example for each.

Assume the asset market is always in equilibrium. Therefore a fall in Y would result in

Explain the following figure:

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 consumers experience an decrease in lifetime income, current spending will , current saving will , and future spending will .