Question 1

What is inflation bias?
 What measures have governments taken to avoid it?

Accepted Answer

Inflation bias is caused when a governme

Question 2

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 3

When an economy is in a liquidity trap

Accepted Answer

A)  monetary policy cannot be used to influence the exchange rate. 
B)  monetary policy can be used to drive interest rates down, but not to drive them up. 
C)  there is an excess demand for bonds. 
D)  people and institutions avoid holding cash balances. 
E)  it can escape only by introducing a hard, or illiquid, currency. 
A)  monetary policy cannot be used to influence the exchange rate. 
B)  monetary policy can be used to drive interest rates down, but not to drive them up. 
C)  there is an excess demand for bonds. 
D)  people and institutions avoid holding cash balances. 
E)  it can escape only by introducing a hard, or illiquid, currency.

Question 4

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 5

The domestic currency price of a representative domestic 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 6

If the representative basket of European goods and services costs 40 euros, the representative U.S. basket costs $50, and the dollar/euro exchange rate is $0.90 per euro, then the price of the European basket in terms of U.S. basket is

Accepted Answer

A)  [(0.9 $/euro) (40 euro per a European basket)]/[(50 $/U.S. basket)]. 
B)  [(0.9 $/euro) (50 $/U.S. basket)]/[(40 euro per a European basket)]. 
C)  [(40 euro per a European basket)]/[(50 $/U.S. basket) (0.9 $/euro)]. 
D)  [(50 $/U.S. basket)]. 
E)  [(0.9 $/euro) (40 euro per a European basket) (50 $ U.S. basket)]. 
A)  [(0.9 $/euro) (40 euro per a European basket)]/[(50 $/U.S. basket)]. 
B)  [(0.9 $/euro) (50 $/U.S. basket)]/[(40 euro per a European basket)]. 
C)  [(40 euro per a European basket)]/[(50 $/U.S. basket) (0.9 $/euro)]. 
D)  [(50 $/U.S. basket)]. 
E)  [(0.9 $/euro) (40 euro per a European basket) (50 $ U.S. basket)].

Question 7

Using the DD model, explain what happens to output when Government demands increase. Use a figure to explain when it is taking place.

Accepted Answer

The figure below shows the G₁

Question 8

In the short run

Accepted Answer

A)  monetary expansion causes the CA to increase and fiscal expansion causes the CA to decrease. 
B)  monetary expansion causes the CA to decrease and fiscal expansion causes the CA to decrease. 
C)  monetary expansion causes the CA to increase and fiscal expansion causes the CA to increase. 
D)  monetary expansion causes the CA to decrease and fiscal expansion causes the CA to increase. 
E)  monetary expansion causes the CA to increase and the effects of fiscal expansion are ambiguous. 
A)  monetary expansion causes the CA to increase and fiscal expansion causes the CA to decrease. 
B)  monetary expansion causes the CA to decrease and fiscal expansion causes the CA to decrease. 
C)  monetary expansion causes the CA to increase and fiscal expansion causes the CA to increase. 
D)  monetary expansion causes the CA to decrease and fiscal expansion causes the CA to increase. 
E)  monetary expansion causes the CA to increase and the effects of fiscal expansion are ambiguous.

Question 9

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by a depreciation of domestic currency, all else equal. 
B)  For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by a depreciation of foreign currency, all else equal. 
C)  For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by an appreciation of domestic currency, all else equal. 
D)  For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of domestic currency, all else equal. 
E)  For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of foreign currency, all else equal. 
A)  For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by a depreciation of domestic currency, all else equal. 
B)  For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by a depreciation of foreign currency, all else equal. 
C)  For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by an appreciation of domestic currency, all else equal. 
D)  For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of domestic currency, all else equal. 
E)  For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of foreign currency, all else equal.

Question 10

When the real exchange rate rises

Accepted Answer

A)  imports measured in terms of domestic output will rise. 
B)  imports measured in terms of domestic output will fall. 
C)  imports measured in terms of domestic output will never be affected. 
D)  imports measured in terms of domestic output may rise or fall. 
E)  imports measured in terms of foreign output will rise. 
A)  imports measured in terms of domestic output will rise. 
B)  imports measured in terms of domestic output will fall. 
C)  imports measured in terms of domestic output will never be affected. 
D)  imports measured in terms of domestic output may rise or fall. 
E)  imports measured in terms of foreign output will rise.

Question 11

If consumers experience an decrease in lifetime income, current spending will ________, current saving will ________, and future spending will ________.

Accepted Answer

A)  decrease; decrease; decrease 
B)  increase; decrease; decrease 
C)  increase; decrease; increase 
D)  increase; increase; decrease 
E)  decrease; increase; increase 
A)  decrease; decrease; decrease 
B)  increase; decrease; decrease 
C)  increase; decrease; increase 
D)  increase; increase; decrease 
E)  decrease; increase; increase

Question 12

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 13

If a country's nominal interest rate is zero, then

Accepted Answer

A)  the country's economy is in a liquidity trap. 
B)  exchange rates with other countries are likely to decline. 
C)  exchange rates with other countries are likely to increase. 
D)  monetary policy is likely to be very effective in stimulating the economy. 
E)  the country's economy has achieved monetary equilibrium. 
A)  the country's economy is in a liquidity trap. 
B)  exchange rates with other countries are likely to decline. 
C)  exchange rates with other countries are likely to increase. 
D)  monetary policy is likely to be very effective in stimulating the economy. 
E)  the country's economy has achieved monetary equilibrium.

Question 14

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.

What is inflation bias? What measures have governments taken to avoid it?

How does a rise in real income affect aggregate demand?

When an economy is in a liquidity trap

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

The domestic currency price of a representative domestic expenditure basket is

If the representative basket of European goods and services costs 40 euros, the representative U.S. basket costs $50, and the dollar/euro exchange rate is $0.90 per euro, then the price of the European basket in terms of U.S. basket is

Using the DD model, explain what happens to output when Government demands increase. Use a figure to explain when it is taking place.

In the short run

Which one of the following statements is the MOST accurate?

When the real exchange rate rises

If consumers experience an decrease in lifetime income, current spending will , current saving will , and future spending will .

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

If a country's nominal interest rate is zero, then

The domestic currency price of a representative foreign expenditure basket 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

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

What is inflation bias? What measures have governments taken to avoid it?

How does a rise in real income affect aggregate demand?

When an economy is in a liquidity trap

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

The domestic currency price of a representative domestic expenditure basket is

If the representative basket of European goods and services costs 40 euros, the representative U.S. basket costs $50, and the dollar/euro exchange rate is $0.90 per euro, then the price of the European basket in terms of U.S. basket is

Using the DD model, explain what happens to output when Government demands increase. Use a figure to explain when it is taking place.

In the short run

Which one of the following statements is the MOST accurate?

When the real exchange rate rises

If consumers experience an decrease in lifetime income, current spending will ________, current saving will ________, and future spending will ________.

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

If a country's nominal interest rate is zero, then

The domestic currency price of a representative foreign expenditure basket 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 consumers experience an decrease in lifetime income, current spending will , current saving will , and future spending will .