Exam 27: Prices and Output in the Open Economy: Aggregate Supply and Demand

The derivation of the aggregate demand curve (AD) in the closed economy builds upon the fact that, as the domestic price level rises, other things equal, the equilibrium level of income in the IS/LM diagram __________.

If actual prices in a country are less than the expected prices in the country, then the country's

In a situation of stagflation, the use of aggregate demand-oriented macro policy to address the problem of the rising price level would, at least in the short run, __________ the price level and __________ the level of output in the economy.

If the AD curve intersects the short-run aggregate supply curve to the left of the long-run aggregate supply curve, under flexible exchange rates, then the long-run equilibrium position

Many positive investment opportunities with higher expected rates of return have recently been opening up in Central, Eastern, and Western Europe. Explain the effects that such opportunities might have on U.S. financial markets and economic activity, using the AD/AS framework. Will this have inflationary or deflationary effects on the United States? Why? What problems might occur if the U.S. government attempts to offset the short-run price effects of this external phenomenon?

Other things equal, with imported intermediate goods, an increase in foreign prices will lead to a __________ shift in a home country's short-run aggregate supply curve and__________ shift in the home country's aggregate demand curve.

If exchange rates are fixed, an increase in the money supply will lead to __________ in The equilibrium level of income and to __________ in the price level.

If a country's currency depreciates in the foreign exchange markets, the result will be a shift of the aggregate demand curve __________; in addition, if intermediate goods are an important component of the country's imports, the short-run aggregate supply curve __________.

The derivation of the aggregate demand curve (AD) in the open economy builds upon the Fact that, as the price level rises, other things equal,

Suppose that there is an exogenous increase in foreign prices. Using the AD/AS framework, explain how this would affect the domestic economy under fixed exchange rates and under flexible exchange rates. Would your answer be different if there were no imported inputs into the production process? Why or why not?

In the aggregate demand/aggregate supply framework

Suppose that, in a world of flexible wages and prices, there is a sudden autonomous increase in the flow of short-term financial capital into country A. Will the impact on country A's aggregate demand (AD) curve and hence on output in the short run be different in if A has a flexible exchange rate rather than a fixed exchange rate? Explain.

Appreciation of the domestic currency will

Stagflation can result

Suppose that a partner country autonomously increases its demand for the home country's exports. With a fixed exchange system, this increase in export demand __________; with a flexible exchange rate system, this increase in export demand __________.

What effect does opening the economy have on the aggregate demand curve? The aggregate supply curve? Is it possible that the long-run supply curve will shift to the right more rapidly in the open economy than in the closed economy? Why or why not?

In considering the slope of the open-economy aggregate demand curve (AD), a valid general statement is that, other things equal, the open-economy AD __________.

According to the New Classical economists, with rational expectations, an increase in the money supply will

It has been argued that one advantage of fixed exchange rates is that they promote price discipline or price stability between trading partners. Is this argument supported by the AD/AS framework? Why or why not?

An increase in the long-run equilibrium level of income can result from