Question 1

How does a rise in real income affect aggregate demand?

Accepted Answer

A)  Y ↑ implies Yd ↑ implies Im ↑ implies CA ↓ implies AD ↓, but Y ↑ implies Yd ↑ implies C ↑ implies AD ↑ by more. 
B)  Y ↑ implies Yd ↑ implies Im ↓ implies CA ↓ implies AD ↓, but Y ↑ implies Yd ↑ implies C ↑ implies AD ↑ by more. 
C)  Y ↑ implies Yd ↑ implies Im ↑ implies CA ↑ implies AD ↑, and Y ↑ implies Yd ↑ implies C ↑ implies AD ↑. 
D)  Y ↑ implies Yd ↑ implies Im ↑ implies CA ↓ implies AD ↓, but Y ↑ implies Yd ↑ implies C ↑ implies AD ↑ by less. 
E)  Y ↑ implies Yd ↑ implies Im ↓ implies CA ↓ implies AD ↓, but Y ↑ implies Yd ↑ implies C ↑ implies AD ↑ by less. 
A)  Y ↑ implies Yd ↑ implies Im ↑ implies CA ↓ implies AD ↓, but Y ↑ implies Yd ↑ implies C ↑ implies AD ↑ by more. 
B)  Y ↑ implies Yd ↑ implies Im ↓ implies CA ↓ implies AD ↓, but Y ↑ implies Yd ↑ implies C ↑ implies AD ↑ by more. 
C)  Y ↑ implies Yd ↑ implies Im ↑ implies CA ↑ implies AD ↑, and Y ↑ implies Yd ↑ implies C ↑ implies AD ↑. 
D)  Y ↑ implies Yd ↑ implies Im ↑ implies CA ↓ implies AD ↓, but Y ↑ implies Yd ↑ implies C ↑ implies AD ↑ by less. 
E)  Y ↑ implies Yd ↑ implies Im ↓ implies CA ↓ implies AD ↓, but Y ↑ implies Yd ↑ implies C ↑ implies AD ↑ by less.

Question 2

Which of the following have to be in equilibrium for the economy to be in equilibrium?

Accepted Answer

A)  the money market only 
B)  the goods market only 
C)  the output and asset markets 
D)  the savings and investment markets 
E)  the goods and output markets 
A)  the money market only 
B)  the goods market only 
C)  the output and asset markets 
D)  the savings and investment markets 
E)  the goods and output markets

Question 3

How is the AA schedule derived?

Accepted Answer

A)  It is derived by the schedule of interest rate and output combinations that are consistent with equilibrium in the domestic money market and the foreign exchange market. 
B)  It is derived by the schedule of exchange rate and output combinations that are consistent with equilibrium in the foreign money market and the domestic exchange market. 
C)  It is derived by the schedule of exchange rate and output combinations that are consistent with equilibrium in the domestic money market and the foreign exchange market. 
D)  It is derived by the schedule of exchange rate and output combinations that are consistent with equilibrium in the domestic bond market and the foreign asset market. 
E)  It is derived by the schedule of exchange rate and output combinations that are greater than equilibrium in the foreign money market and the domestic exchange market. 
A)  It is derived by the schedule of interest rate and output combinations that are consistent with equilibrium in the domestic money market and the foreign exchange market. 
B)  It is derived by the schedule of exchange rate and output combinations that are consistent with equilibrium in the foreign money market and the domestic exchange market. 
C)  It is derived by the schedule of exchange rate and output combinations that are consistent with equilibrium in the domestic money market and the foreign exchange market. 
D)  It is derived by the schedule of exchange rate and output combinations that are consistent with equilibrium in the domestic bond market and the foreign asset market. 
E)  It is derived by the schedule of exchange rate and output combinations that are greater than equilibrium in the foreign money market and the domestic exchange market.

Question 4

In the short run, any fall in EP   /P, regardless of its causes, will cause

Accepted Answer

A)  an upward shift in the aggregate demand function and an expansion of output. 
B)  an upward shift in the aggregate demand function and a reduction in 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 an expansion of output. 
B)  an upward shift in the aggregate demand function and a reduction in 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 5

Monetary expansion causes the current account balance to increase in the short run. Discuss. Is the same the case for fiscal expansion?

Accepted Answer

An increase in the money supply leads to

Question 6

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

Accepted Answer

Changes in the domestic money supply; ch

Question 7

In the short run, a tax increase

Accepted Answer

A)  shifts the DD curve to the right, increases output and appreciates the currency. 
B)  shifts the AA curve to the left, increases output and depreciates the currency. 
C)  shifts the AA curve to the left, decreases output and depreciates the currency. 
D)  shifts the AA curve to the left, increases output and appreciates the currency. 
E)  shifts the DD curve to the left, decreases output and depreciates the currency. 
A)  shifts the DD curve to the right, increases output and appreciates the currency. 
B)  shifts the AA curve to the left, increases output and depreciates the currency. 
C)  shifts the AA curve to the left, decreases output and depreciates the currency. 
D)  shifts the AA curve to the left, increases output and appreciates the currency. 
E)  shifts the DD curve to the left, decreases output and depreciates the currency.

Question 8

According to historical data, what is the effect of a sharp change in the current account on the exchange rate (both in the short and long run)?

Accepted Answer

A)  At first, home currency will depreciate as CA balance falls, but over time, currency will begin to depreciate. 
B)  At first, home currency will appreciate as CA balance falls, but over time, currency will begin to depreciate. 
C)  At first, home currency will appreciate as CA balance rises, but over time, currency will begin to depreciate. 
D)  At first, home currency will depreciate as CA balance falls, but over time, currency will begin to appreciate. 
E)  At first, home currency will appreciate as CA balance falls, but over time, currency will begin to appreciate. 
A)  At first, home currency will depreciate as CA balance falls, but over time, currency will begin to depreciate. 
B)  At first, home currency will appreciate as CA balance falls, but over time, currency will begin to depreciate. 
C)  At first, home currency will appreciate as CA balance rises, but over time, currency will begin to depreciate. 
D)  At first, home currency will depreciate as CA balance falls, but over time, currency will begin to appreciate. 
E)  At first, home currency will appreciate as CA balance falls, but over time, currency will begin to appreciate.

Question 9

How does an increase in the real exchange rate affect exports and imports?

Accepted Answer

A)  exports increase; imports decrease 
B)  exports decrease; imports increase 
C)  exports increase; imports change ambiguously 
D)  exports change ambiguously; imports decrease 
E)  exports increase; imports are constant 
A)  exports increase; imports decrease 
B)  exports decrease; imports increase 
C)  exports increase; imports change ambiguously 
D)  exports change ambiguously; imports decrease 
E)  exports increase; imports are constant

Question 10

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  An increase in disposable income improves the current account. 
B)  An increase in disposable income does not affect the current account. 
C)  An increase in disposable income worsens the current account. 
D)  An increase in income worsens the current account. 
E)  An increase in income improves the current account. 
A)  An increase in disposable income improves the current account. 
B)  An increase in disposable income does not affect the current account. 
C)  An increase in disposable income worsens the current account. 
D)  An increase in income worsens the current account. 
E)  An increase in income improves the current account.

Question 11

Use a figure to study the following question: Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD, where both the output and asset markets are out of equilibrium. Explain what will happen next.

Accepted Answer

Since the asset market adjusts very quic

Question 12

In long-run equilibrium after a permanent money-supply increase there follows:

Accepted Answer

A)  an increase in exchange rate, E. 
B)  a decrease in exchange rate, E. 
C)  an increase in output, Y. 
D)  a decrease in output, Y. 
E)  an unchanged exchange rate, E. 
A)  an increase in exchange rate, E. 
B)  a decrease in exchange rate, E. 
C)  an increase in output, Y. 
D)  a decrease in output, Y. 
E)  an unchanged exchange rate, E.

Question 13

The domestic currency price of a representative foreign expenditure basket is

Accepted Answer

A)  P, the domestic price level. 
B)  E, the nominal exchange rate. 
C)  P times E, the domestic price level times the domestic price level. 
D)  P   , the foreign price level. 
E)  P   times E, the foreign price level times the nominal exchange rate. 
A)  P, the domestic price level. 
B)  E, the nominal exchange rate. 
C)  P times E, the domestic price level times the domestic price level. 
D)  P   , the foreign price level. 
E)  P   times E, the foreign price level times the nominal exchange rate.

Question 14

Which of the following is TRUE of the current account balance?

Accepted Answer

A)  Monetary expansion has no effect on the current account balance. 
B)  Monetary expansion decreases the current account balance. 
C)  Fiscal expansion increases the current account balance. 
D)  Fiscal expansion has no effect on the current account balance. 
E)  Monetary expansion increases the current account balance. 
A)  Monetary expansion has no effect on the current account balance. 
B)  Monetary expansion decreases the current account balance. 
C)  Fiscal expansion increases the current account balance. 
D)  Fiscal expansion has no effect on the current account balance. 
E)  Monetary expansion increases the current account balance.

Question 15

A permanent fiscal expansion

Accepted Answer

A)  shifts the DD and the AA schedules to the right, increasing output. 
B)  shifts the DD and the AA schedules to the right, decreasing output. 
C)  shifts the DD to the right and the AA schedule to the left, leaving output the same. 
D)  shifts the DD to the left and the AA schedule to the left, decreasing output. 
E)  shifts the DD and the AA schedules to the left, leaving output the same. 
A)  shifts the DD and the AA schedules to the right, increasing output. 
B)  shifts the DD and the AA schedules to the right, decreasing output. 
C)  shifts the DD to the right and the AA schedule to the left, leaving output the same. 
D)  shifts the DD to the left and the AA schedule to the left, decreasing output. 
E)  shifts the DD and the AA schedules to the left, leaving output the same.

Question 16

Demonstrate how a permanent fiscal expansion will not increase output in the long run.

Accepted Answer

(1) E on Y-axis, Y on X-axis
(2) DD shif

Question 17

A country's domestic currency's real exchange rate, q, is best described by

Accepted Answer

A)  the price of similar goods in the same market. 
B)  the price of the domestic basket in terms of the foreign one. 
C)  the price of a domestic basket. 
D)  the price of the foreign basket in terms of the domestic basket. 
E)  the price of different goods baskets in the same market. 
A)  the price of similar goods in the same market. 
B)  the price of the domestic basket in terms of the foreign one. 
C)  the price of a domestic basket. 
D)  the price of the foreign basket in terms of the domestic basket. 
E)  the price of different goods baskets in the same market.

Question 18

Assume the output market adjusts more rapidly than the asset market. A point of disequilibrium that is below both AA and DD will therefore initially result in

Accepted Answer

A)  an increase in output. 
B)  a decrease in output. 
C)  a contraction of the money supply. 
D)  a depreciation of the home currency. 
E)  an appreciation of the home currency. 
A)  an increase in output. 
B)  a decrease in output. 
C)  a contraction of the money supply. 
D)  a depreciation of the home currency. 
E)  an appreciation of the home currency.

Question 19

In practice, many U.S. import prices tend to rise by only around

Accepted Answer

A)  1/4 of a typical dollar depreciation over the following year. 
B)  1/3 of a typical dollar depreciation over the following year. 
C)  1/2 of a typical dollar depreciation over the following year. 
D)  2/3 of a typical dollar depreciation over the following year. 
E)  2/5 of a typical dollar depreciation over the following year. 
A)  1/4 of a typical dollar depreciation over the following year. 
B)  1/3 of a typical dollar depreciation over the following year. 
C)  1/2 of a typical dollar depreciation over the following year. 
D)  2/3 of a typical dollar depreciation over the following year. 
E)  2/5 of a typical dollar depreciation over the following year.

Question 20

In the short run, with prices fixed, how would an increase in government spending affect the DD-AA equilibrium?

Accepted Answer

A)  It will increase output and appreciate the currency. 
B)  It will increase output and depreciate the currency. 
C)  It will decrease output and appreciate the currency. 
D)  It will decrease output and depreciate the currency. 
E)  It will increase output and have no effect on the currency. 
A)  It will increase output and appreciate the currency. 
B)  It will increase output and depreciate the currency. 
C)  It will decrease output and appreciate the currency. 
D)  It will decrease output and depreciate the currency. 
E)  It will increase output and have no effect on the currency.

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

How does a rise in real income affect aggregate demand?

Which of the following have to be in equilibrium for the economy to be in equilibrium?

How is the AA schedule derived?

In the short run, any fall in EP /P, regardless of its causes, will cause

Monetary expansion causes the current account balance to increase in the short run. Discuss. Is the same the case for fiscal expansion?

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

In the short run, a tax increase

According to historical data, what is the effect of a sharp change in the current account on the exchange rate (both in the short and long run)?

How does an increase in the real exchange rate affect exports and imports?

Which one of the following statements is the MOST accurate?

Use a figure to study the following question: Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD, where both the output and asset markets are out of equilibrium. Explain what will happen next.

In long-run equilibrium after a permanent money-supply increase there follows:

The domestic currency price of a representative foreign expenditure basket is

Which of the following is TRUE of the current account balance?

A permanent fiscal expansion

Demonstrate how a permanent fiscal expansion will not increase output in the long run.

A country's domestic currency's real exchange rate, q, is best described by

Assume the output market adjusts more rapidly than the asset market. A point of disequilibrium that is below both AA and DD will therefore initially result in

In practice, many U.S. import prices tend to rise by only around

In the short run, with prices fixed, how would an increase in government spending affect the DD-AA equilibrium?

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

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