Exam 10: Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy

An overvalued currency arises when

Compared to a system of fixed exchange rates, currency unions are beneficial because they

The reason that fiscal policy is ineffective during a recession is that

When the British pound rises in value relative to other currencies, then

Three-wheel cars made in North Edsel are sold for 5000 pounds. Four-wheel cars made in South Edsel are sold for 10,000 marks. The nominal exchange rate between the two countries is three marks per pound. The real exchange rate is

Which of the following statements is true?

When the real exchange rate rises, what happens to net exports in the short run? In the long run? What explains the difference between the short-run effect and the long-run effect?

A decline in the domestic real interest rate would cause a ________ in net exports and a ________ in the exchange rate.

Which of the following is not a reason for why domestic and foreign interest rates might differ?

Suppose the dollar/franc exchange rate rises. Then

Which of the following statement best describes the movement of the Canadian dollar against the US dollar in the period 2002-2008?

Describe the effects of contractionary fiscal policy by the domestic government on output, the real interest rate, and net exports in both the domestic and foreign country, using a Keynesian model.

When the rate of appreciation of the nominal exchange rate equals the foreign inflation rate minus the domestic inflation rate, we say there is

The net export crowding out effect refers to a situation in which

Suppose the dollar/franc exchange rate falls. Then

An increase in the Canadian money supply would cause the value of the dollar to ________ and net Canadian exports to ________ in the short run using a Keynesian model.

a. What happens to the fundamental value of a country's exchange rate when it raises its money supply in a fixed-exchange-rate system? Does this make the currency overvalued or undervalued if originally the official rate equaled the fundamental value? b. What happens to the fundamental value of a country's exchange rate when the foreign country raises its money supply? Does this make the currency overvalued or undervalued if originally the official rate equaled the fundamental value? c. So, if a country wants to maintain its official rate equal to its fundamental value, what must it do when the foreign country raises its money supply? What happens to inflation?

According to the classical model, an increase in the Canadian nominal money supply would cause the nominal exchange rate to ________ and the real exchange rate to ________.

A temporary decrease in government purchases would ________ the domestic real interest rate and ________ net desired saving (desired saving less desired investment) in the economy.

The European Monetary System is an example of