Question 1

A permanent increase in the domestic money supply

Accepted Answer

A) must ultimately lead to a proportional decrease in E,and,therefore,the expected future exchange rate must rise proportionally. 
B) must ultimately lead to a proportional decrease in E,and,therefore,the expected future exchange rate must decrease proportionally. 
C) must ultimately lead to a proportional rise in E,and,therefore,the expected future exchange rate must rise proportionally. 
D) must ultimately lead to a proportional rise in E,and,therefore,the expected future exchange rate must rise more than proportionally. 
E) must ultimately lead to a proportional rise in E,and,therefore,the expected future exchange rate must rise less than proportionally. 
A) must ultimately lead to a proportional decrease in E,and,therefore,the expected future exchange rate must rise proportionally. 
B) must ultimately lead to a proportional decrease in E,and,therefore,the expected future exchange rate must decrease proportionally. 
C) must ultimately lead to a proportional rise in E,and,therefore,the expected future exchange rate must rise proportionally. 
D) must ultimately lead to a proportional rise in E,and,therefore,the expected future exchange rate must rise more than proportionally. 
E) must ultimately lead to a proportional rise in E,and,therefore,the expected future exchange rate must rise less than proportionally. C

Question 2

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. C

Question 3

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. A

Question 4

Using a figure show that under full employment,a temporary fiscal expansion would increase output (over-employment)but cannot increase output in the long run.

Accepted Answer

A temporarily fiscal expansion will move

Question 5

Imagine that the economy is at a point on that is below both AA and DD,where both the output and asset markets are out of equilibrium.Which first action is TRUE?

Accepted Answer

A) The economy will stay at this level in the short run. 
B) The exchange rate will first rise to a point on the AA schedule. 
C) The exchange rate will first rise to a point on the DD schedule. 
D) The AA-DD equilibrium will shift to the position of the economy. 
E) The output level will first increase to a position on the DD schedule. 
A) The economy will stay at this level in the short run. 
B) The exchange rate will first rise to a point on the AA schedule. 
C) The exchange rate will first rise to a point on the DD schedule. 
D) The AA-DD equilibrium will shift to the position of the economy. 
E) The output level will first increase to a position on the DD schedule.

Question 6

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 household 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 household and firms throughout the world 
D) individual's demand 
E) domestic demand of foreign imports.

Question 7

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 shifts

Question 8

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 9

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 10

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 11

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) an 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) an 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 12

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

Accepted Answer

Correct answers include any situations t

Question 13

Which statement best describes the current account balance in the short run?

Accepted Answer

A) Monetary expansion lowers the current account balance. 
B) Monetary expansion keeps the current account balance the same. 
C) Fiscal expansion increases the current account balance. 
D) Fiscal expansion keeps the current account balance the same. 
E) Monetary expansion increases the current account balance. 
A) Monetary expansion lowers the current account balance. 
B) Monetary expansion keeps the current account balance the same. 
C) Fiscal expansion increases the current account balance. 
D) Fiscal expansion keeps the current account balance the same. 
E) Monetary expansion increases the current account balance.

Question 14

The J-curve illustrates which of the following?

Accepted Answer

A) the effects of depreciation on the home country's economy 
B) the immediate increase in current account caused by a currency depreciation 
C) the gradual adjustment of home prices to a currency depreciation 
D) the short-term effects of depreciation on the current account 
E) the Keynesian view of international trade dynamics 
A) the effects of depreciation on the home country's economy 
B) the immediate increase in current account caused by a currency depreciation 
C) the gradual adjustment of home prices to a currency depreciation 
D) the short-term effects of depreciation on the current account 
E) the Keynesian view of international trade dynamics

Question 15

The percent by which import prices rise when the home currency depreciates by 1% is the degree of

Accepted Answer

A) pass-forward from exchange rates to import prices. 
B) pass-through from exchange rates to import prices. 
C) pass-on from exchange rates to import prices. 
D) roll-forward from exchange rates to import prices. 
E) pass-beyond from exchange rates to import prices. 
A) pass-forward from exchange rates to import prices. 
B) pass-through from exchange rates to import prices. 
C) pass-on from exchange rates to import prices. 
D) roll-forward from exchange rates to import prices. 
E) pass-beyond from exchange rates to import prices.

Question 16

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 17

The Marshall-Lerner Condition states that,all else equal

Accepted Answer

A) nominal appreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate. 
B) real depreciation improves the current account if export and import volumes are sufficiently inelastic with respect to the real exchange rate. 
C) real appreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate. 
D) real depreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate. 
E) the sum of import and export elasticities must be equal to one in order for depreciation to occur. 
A) nominal appreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate. 
B) real depreciation improves the current account if export and import volumes are sufficiently inelastic with respect to the real exchange rate. 
C) real appreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate. 
D) real depreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate. 
E) the sum of import and export elasticities must be equal to one in order for depreciation to occur.

Question 18

Which one of the following statements is the MOST accurate?

Accepted Answer

A) An increase in the real exchange rate and an increase in disposable income improve the current account. 
B) A decrease in the real exchange rate and a decrease in disposable income improve the current account. 
C) A decrease in the real exchange rate and a increase in disposable income improve the current account. 
D) An increase in the real exchange rate and a decrease in disposable income improve the current account. 
E) An increase in the real exchange rate and a decrease in disposable income lowers the current account. 
A) An increase in the real exchange rate and an increase in disposable income improve the current account. 
B) A decrease in the real exchange rate and a decrease in disposable income improve the current account. 
C) A decrease in the real exchange rate and a increase in disposable income improve the current account. 
D) An increase in the real exchange rate and a decrease in disposable income improve the current account. 
E) An increase in the real exchange rate and a decrease in disposable income lowers the current account.

Question 19

How does an increase in the real exchange rate affect exports and imports?

Accepted Answer

A) Exports increase;imports decrease. 
B) Exports decrease;imports increase. 
C) Exports increase;imports change ambiguously. 
D) Exports change ambiguously;imports decrease. 
E) Exports increase;imports are constant. 
A) Exports increase;imports decrease. 
B) Exports decrease;imports increase. 
C) Exports increase;imports change ambiguously. 
D) Exports change ambiguously;imports decrease. 
E) Exports increase;imports are constant.

Question 20

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

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

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

A permanent increase in the domestic money supply

How is the AA schedule derived?

An intertemporal budget constraint

Using a figure show that under full employment,a temporary fiscal expansion would increase output (over-employment)but cannot increase output in the long run.

Imagine that the economy is at a point on that is below both AA and DD,where both the output and asset markets are out of equilibrium.Which first action is TRUE?

What is the best way to describe aggregate demand?

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

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

The interest parity condition requires that:

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

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

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

Which statement best describes the current account balance in the short run?

The J-curve illustrates which of the following?

The percent by which import prices rise when the home currency depreciates by 1% is the degree of

In the short-run,a temporary increase in money supply

The Marshall-Lerner Condition states that,all else equal

Which one of the following statements is the MOST accurate?

How does an increase in the real exchange rate affect exports and imports?

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

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 .