Exam 11: The Is-Mp Model: Adding Inflation and the Open Economy

Under a fixed exchange rate system,at low domestic real interest rates net capital outflows are ________,so the central bank ________ foreign-exchange reserves.

A decrease in the real interest rate outside of Canada will cause net capital outflows to ________ and cause the dollar to ________ relative to other currencies.

Among the countries that use the euro,the real exchange rate ________ and the nominal exchange rate ________.

Figure 11.2 -Refer to Figure 11.2..Assume the economy is in equilibrium at Ȳ₁,where real GDP equals potential GDP.The economy experiences a positive demand shock,and the Bank of Canada responds by increasing real interest rates to bring real GDP and inflation back to their original levels.Other things equal,the Bank of Canada's response following the positive demand shock is best represented by a(n)

The financial market shock that occurred during the Great Recession increased the default-risk premium,causing the

Figure 11.2 -Refer to Figure 11.2..Assume the economy is in equilibrium at Ȳ₁,where real GDP equals potential GDP.The economy experiences a negative demand shock,and the Bank of Canada responds by decreasing real interest rates to bring real GDP and inflation back to their original levels.Other things equal,the negative demand shock is best represented by a movement from

Assume the expected inflation for this year was 2%,but the actual inflation turned to be 6%.What are the implications of this unanticipated inflation on: a) your salary? b) your student loan?

An increase in the real interest rate in Canada will cause the dollar to ________ relative to other currencies and ________ net exports and real GDP.

If the real interest rate in Canada increases,foreign investors will ________ their demand for Canadian dollars because they desire to ________ more Canadian financial assets.

Figure 11.2 -Refer to Figure 11.2..Assume the economy is in equilibrium at Ȳ₁,where real GDP equals potential GDP,and then the economy experiences a negative demand shock.Other things equal,the negative demand shock is best represented by a(n)

One event that undermined the belief that the Phillips curve represented a structural relationship was

Economists initially viewed the Phillips curve as a structural relationship,meaning that the relationship between the two measured variables

A decrease in the real interest rate outside of Canada will cause the dollar to ________ relative to other currencies and ________ net exports and real GDP.

Under a fixed exchange rate system,if the government decides to increase the fixed exchange rate,net exports will ________ and the IS curve will shift to the ________.

Figure 11.1 -Refer to Figure 11.1..Assume the economy is in equilibrium at Ȳ₁ = 0.Other things equal,a decrease in the growth rate of productivity will result in a movement from point ________ to point ________.

A decrease in the real interest rate outside of Canada will ________ the demand for the dollar and ________ the demand for foreign financial assets.

With adaptive expectations,the expected inflation rate for the current year ________ the actual inflation rate for the previous year.

Describe each of the following as a positive demand shock,a negative demand shock,a positive supply shock,or a negative supply shock,and specify how each is represented on the Phillips curve. a. a sudden increase in oil prices b. a large increase in spending on residential construction c. a sudden decrease in household wealth resulting from a stock market crash d. a substantial increase in productivity following technological advancements

The financial market shock that occurred during the Great Recession increased the default-risk premium,and the housing shock that also occurred during the recession reduced wealth and residential construction.These two events would result in

If the real interest rate in Canada decreases,foreign investors will ________ their demand for Canadian dollars because they desire to ________ fewer Canadian financial assets.