Question 1

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. A

Question 2

Give 4 examples of situations that would cause the DD-curve to shift to the left.

Accepted Answer

Correct answers include any situations that involve:
(1) a decrease in government spending (e.g., decrease in military spending)
(2) an increase in taxes
(3) a fall in Investment demand
(4) a price increase, which would lower net export demand (assuming E and P* stay constant)
(5) a fall in foreign prices (assuming E and P stay constant)
(6) an autonomous fall in consumption demand (as long as it is not entirely a change in import demand)
(7) a shift to demanding more foreign goods at the expense of domestic good demand

Question 3

The real exchange rate is:

Accepted Answer

A)  how much of a foreign currency you can buy with the domestic currency. 
B)  foreign CPI divided by the domestic CPI. 
C)  the price of foreign goods in terms of domestic goods. 
D)  the price of foreign goods in dollars. 
E)  the domestic currency divided by the price level. 
A)  how much of a foreign currency you can buy with the domestic currency. 
B)  foreign CPI divided by the domestic CPI. 
C)  the price of foreign goods in terms of domestic goods. 
D)  the price of foreign goods in dollars. 
E)  the domestic currency divided by the price level. C

Question 4

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 5

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

Accepted Answer

A)  has stronger effects on the exchange rate and output than an equal temporary increase. 
B)  has stronger effects only on the exchange rate but not on output than an equal temporary increase. 
C)  has weaker effects on the exchange rate and output than an equal temporary increase. 
D)  has stronger effects on output, but lower effect on the exchange rate than an equal temporary increase. 
E)  has weaker effects only on the exchange rate than an equal temporary increase. 
A)  has stronger effects on the exchange rate and output than an equal temporary increase. 
B)  has stronger effects only on the exchange rate but not on output than an equal temporary increase. 
C)  has weaker effects on the exchange rate and output than an equal temporary increase. 
D)  has stronger effects on output, but lower effect on the exchange rate than an equal temporary increase. 
E)  has weaker effects only on the exchange rate than an equal temporary increase.

Question 6

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 7

Describe a J Curve.

Accepted Answer

The time lag with which real currency de

Question 8

Which of the following would cause the current account to decrease?

Accepted Answer

A)  an increase in the nominal exchange rate, E 
B)  an appreciation of the home currency 
C)  an increase in disposable income 
D)  an increase in foreign prices, P* 
E)  a decrease in domestic prices, P 
A)  an increase in the nominal exchange rate, E 
B)  an appreciation of the home currency 
C)  an increase in disposable income 
D)  an increase in foreign prices, P* 
E)  a decrease in domestic prices, P

Question 9

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 10

What is the AA-curve?
 Why does it have a negative slope?
 What factors cause it to shift?

Accepted Answer

The AA-curve is the specific levels of E

Question 11

What is the best way to describe aggregate demand?

Accepted Answer

A)  quantity required to satisfy equilibrium 
B)  exports decrease; imports increase 
C)  amount of a country's goods and services demanded by households and firms throughout the world 
D)  individual's demand 
E)  domestic demand of foreign imports. 
A)  quantity required to satisfy equilibrium 
B)  exports decrease; imports increase 
C)  amount of a country's goods and services demanded by households and firms throughout the world 
D)  individual's demand 
E)  domestic demand of foreign imports.

Question 12

Fill in the following table.

Accepted Answer

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

Question 13

Explain the following figure:

Accepted Answer

The figure depicts the effect of a perma

Question 14

Explain how an increase in government spending would affect the DD-AA schedule in the short run.

Accepted Answer

An increase in government spending will

Question 15

An intertemporal budget constraint

Accepted Answer

A)  requires the present value of consumption to be equal to the present value of production. 
B)  requires total spending in each period to be equal to total consumption in each period. 
C)  does not take into account the ability to borrow or loan goods domestically. 
D)  categorizes income into permanent and temporary income. 
E)  limits consumption to the amount produced in each time period. 
A)  requires the present value of consumption to be equal to the present value of production. 
B)  requires total spending in each period to be equal to total consumption in each period. 
C)  does not take into account the ability to borrow or loan goods domestically. 
D)  categorizes income into permanent and temporary income. 
E)  limits consumption to the amount produced in each time period.

Question 16

Which of the following equations does NOT state a condition required for equilibrium output:?

Accepted Answer

A)  Y = C(Yᵈ) + I + G + CA(EP*/P,Yᵈ) 
B)  Y = C(Y - T) + I + G + CA(EP*/P,Y - T) 
C)  Y = D(EP*/P,Y - T,I,G) 
D)  R = R* + (EP/
E)  
E)  Y = D(EP*/P,Yᵈ,I,G) 
A)  Y = C(Yᵈ) + I + G + CA(EP*/P,Yᵈ) 
B)  Y = C(Y - T) + I + G + CA(EP*/P,Y - T) 
C)  Y = D(EP*/P,Y - T,I,G) 
D)  R = R* + (EP/
E)  
E)  Y = D(EP*/P,Yᵈ,I,G)

Question 17

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  Over time, the inflationary pressure that follows a temporary money supply expansion pushes the price level to its long-run value and returns the economy to full employment. 
B)  Over time, the inflationary pressure that follows a permanent money supply expansion pushes the price level to its long-run value and returns the economy to full employment. 
C)  Over time, the inflationary pressure that follows a temporary money supply expansion pushes the price level to its long-run value, but leaves the economy in a state of artificially low employment. 
D)  Over time, the inflationary pressure that follows a permanent money supply expansion pushes the price level to its long-run value, but leaves the economy in a state of artificially low employment. 
E)  Over time, the inflationary pressure that follows a permanent money supply expansion pushes the price level beyond its long-run value and lower the level of employment. 
A)  Over time, the inflationary pressure that follows a temporary money supply expansion pushes the price level to its long-run value and returns the economy to full employment. 
B)  Over time, the inflationary pressure that follows a permanent money supply expansion pushes the price level to its long-run value and returns the economy to full employment. 
C)  Over time, the inflationary pressure that follows a temporary money supply expansion pushes the price level to its long-run value, but leaves the economy in a state of artificially low employment. 
D)  Over time, the inflationary pressure that follows a permanent money supply expansion pushes the price level to its long-run value, but leaves the economy in a state of artificially low employment. 
E)  Over time, the inflationary pressure that follows a permanent money supply expansion pushes the price level beyond its long-run value and lower the level of employment.

Question 18

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 19

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 20

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

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

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

Give 4 examples of situations that would cause the DD-curve to shift to the left.

The real exchange rate is:

Which one of the following statements is MOST accurate?

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

The real exchange rate, q, is defined as

Describe a J Curve.

Which of the following would cause the current account to decrease?

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

What is the AA-curve? Why does it have a negative slope? What factors cause it to shift?

What is the best way to describe aggregate demand?

Fill in the following table.

Explain the following figure:

Explain how an increase in government spending would affect the DD-AA schedule in the short run.

An intertemporal budget constraint

Which of the following equations does NOT state a condition required for equilibrium output:?

Which one of the following statements is the MOST accurate?

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.

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

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 ________.

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 .