Question 1

In the short run, a temporary increase in money supply

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 AA curve to the right, increases 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 AA curve to the right, increases output and depreciates the currency.

Question 2

A naïve implication of the DD-AA framework is that either fiscal or monetary policy can lead to full employment. Discuss why this view is naïve.

Accepted Answer

(1) Inflation may arise without any gain

Question 3

Explain how does a rise in real income affect aggregate demand?

Accepted Answer

A rise in domestic real income, Y, leads

Question 4

What would be the best description of what we assume about money prices in the short run?

Accepted Answer

A)  Money prices of goods and services vary. 
B)  Money prices of goods and services are not related to each other. 
C)  Money prices of goods are fixed. 
D)  Money prices of services are fixed. 
E)  Money prices of goods and services are only temporarily fixed. 
A)  Money prices of goods and services vary. 
B)  Money prices of goods and services are not related to each other. 
C)  Money prices of goods are fixed. 
D)  Money prices of services are fixed. 
E)  Money prices of goods and services are only temporarily fixed.

Question 5

The interest parity condition requires that:

Accepted Answer

A)  all countries have the same interest rate. 
B)  there is a unique exchange rate for every output level. 
C)  purchasing power parity hold. 
D)  interest rates are fixed in the short run. 
E)  the money supply is held constant. 
A)  all countries have the same interest rate. 
B)  there is a unique exchange rate for every output level. 
C)  purchasing power parity hold. 
D)  interest rates are fixed in the short run. 
E)  the money supply is held constant.

Question 6

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 7

Which one of the following statements is MOST accurate?

Accepted Answer

A)  Factors of production can only be over-employed in the short run. 
B)  Factors of production can only be under-employed in the short run. 
C)  Factors of production can be over- or under-employed in the long run. 
D)  Factors of production can be over- or under-employed in the short run. 
E)  Factors of production are fully employed in the short run. 
A)  Factors of production can only be over-employed in the short run. 
B)  Factors of production can only be under-employed in the short run. 
C)  Factors of production can be over- or under-employed in the long run. 
D)  Factors of production can be over- or under-employed in the short run. 
E)  Factors of production are fully employed in the short run.

Question 8

How is the AA schedule derived?

Accepted Answer

A)  The AA schedule has a positive slope because an increase in output leads to a depreciation of the currency. 
B)  The AA schedule has a negative slope because an increase in output leads to a decrease in the domestic interest rate. 
C)  The AA schedule has a negative slope because an increase in output leads to an increase in the domestic interest rate and a domestic currency appreciation. 
D)  The AA schedule has a positive slope because an increase in the money supply leads to an increase in the domestic interest rate. 
E)  The AA schedule has a positive slope because a decrease in output leads to a depreciation of the currency. 
A)  The AA schedule has a positive slope because an increase in output leads to a depreciation of the currency. 
B)  The AA schedule has a negative slope because an increase in output leads to a decrease in the domestic interest rate. 
C)  The AA schedule has a negative slope because an increase in output leads to an increase in the domestic interest rate and a domestic currency appreciation. 
D)  The AA schedule has a positive slope because an increase in the money supply leads to an increase in the domestic interest rate. 
E)  The AA schedule has a positive slope because a decrease in output leads to a depreciation of the currency.

Question 9

The aggregate demand for home input can be written as a function of:
I.Real exchange rate.
II.Government spending.
III.Disposable income.

Accepted Answer

A)  I only 
B)  III only 
C)  I and III 
D)  II and III 
E)  I, II, and III 
A)  I only 
B)  III only 
C)  I and III 
D)  II and III 
E)  I, II, and III

Question 10

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 $200, and the dollar/euro exchange rate is $1.20 per euro, then the price of the European basket in terms of U.S. basket is:

Accepted Answer

[(1.20 $/euro) (150 euro per a

Question 11

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 12

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 13

Which of the following is the MOST accurate?

Accepted Answer

A)  Any disturbance that lowers aggregate demand for domestic output shifts the DD schedule to the right. 
B)  Any disturbance that lowers aggregate demand for foreign output shifts the DD schedule to the left. 
C)  Any disturbance that raises aggregate demand for domestic output shifts the DD schedule to the right. 
D)  Any disturbance that raises aggregate demand for domestic output shifts the DD schedule to the left. 
E)  Any disturbance that lowers aggregate demand for domestic output shifts the DD schedule downward. 
A)  Any disturbance that lowers aggregate demand for domestic output shifts the DD schedule to the right. 
B)  Any disturbance that lowers aggregate demand for foreign output shifts the DD schedule to the left. 
C)  Any disturbance that raises aggregate demand for domestic output shifts the DD schedule to the right. 
D)  Any disturbance that raises aggregate demand for domestic output shifts the DD schedule to the left. 
E)  Any disturbance that lowers aggregate demand for domestic output shifts the DD schedule downward.

Question 14

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 15

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 16

The Marshall-Lerner condition holds that a country's current account balance will ________ in response to a real ________ in a nation's currency if the________.

Accepted Answer

A)  improve; depreciation; sum of the price elasticities of export and import demand exceeds 1 
B)  worsen; depreciation; sum of the price elasticities of export and import demand exceeds 1 
C)  improve; appreciation; sum of the price elasticities of export and import demand exceeds 1 
D)  improve; appreciation; sum of the price elasticities of export and import demand exceeds 0 
E)  worsen; depreciation; sum of the price elasticities of export and import demand exceeds 0 
A)  improve; depreciation; sum of the price elasticities of export and import demand exceeds 1 
B)  worsen; depreciation; sum of the price elasticities of export and import demand exceeds 1 
C)  improve; appreciation; sum of the price elasticities of export and import demand exceeds 1 
D)  improve; appreciation; sum of the price elasticities of export and import demand exceeds 0 
E)  worsen; depreciation; sum of the price elasticities of export and import demand exceeds 0

Question 17

How would you define a DD schedule?

Accepted Answer

A)  the combinations of output and the exchange rate that must hold when the home money market and the foreign exchange market are in equilibrium 
B)  the combinations of output and the exchange rate that must hold when the output market is in short-run equilibrium 
C)  factors of production in the long run 
D)  the aggregate demand in relation to the foreign market value 
E)  the currency depreciation in relation to the exchange rate 
A)  the combinations of output and the exchange rate that must hold when the home money market and the foreign exchange market are in equilibrium 
B)  the combinations of output and the exchange rate that must hold when the output market is in short-run equilibrium 
C)  factors of production in the long run 
D)  the aggregate demand in relation to the foreign market value 
E)  the currency depreciation in relation to the exchange rate

Question 18

If the economy starts in long-run equilibrium, a permanent fiscal expansion will cause

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)  shifting of the AA curve up and to the right. 
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)  shifting of the AA curve up and to the right.

Question 19

Explain how the AA schedule is derived.

Accepted Answer

For a fixed real money supply, an increa

Question 20

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.

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

In the short run, a temporary increase in money supply

A naïve implication of the DD-AA framework is that either fiscal or monetary policy can lead to full employment. Discuss why this view is naïve.

Explain how does a rise in real income affect aggregate demand?

What would be the best description of what we assume about money prices in the short run?

The interest parity condition requires that:

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)?

Which one of the following statements is MOST accurate?

How is the AA schedule derived?

The aggregate demand for home input can be written as a function of: I.Real exchange rate. II.Government spending. III.Disposable income.

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 $200, and the dollar/euro exchange rate is $1.20 per euro, then the price of the European basket in terms of U.S. basket is:

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

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

Which of the following is the MOST accurate?

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

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

The Marshall-Lerner condition holds that a country's current account balance will ________ in response to a real ________ in a nation's currency if the________.

How would you define a DD schedule?

If the economy starts in long-run equilibrium, a permanent fiscal expansion will cause

Explain how the AA schedule is derived.

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

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

The Marshall-Lerner condition holds that a country's current account balance will in response to a real in a nation's currency if the.