Question 1

Explain what are the factors that shift the AA Schedule?

Accepted Answer

Changes in the domestic money supply; changes in the domestic price level; changes in the expected future exchange rates; changes in the foreign interest rate and shifts in the aggregate real money demand.

Question 2

The current account increases when

Accepted Answer

A)  real exchange rate decreases. 
B)  real exchange rate increases. 
C)  disposable income increases. 
D)  exports fall. 
E)  domestic prices fall. 
A)  real exchange rate decreases. 
B)  real exchange rate increases. 
C)  disposable income increases. 
D)  exports fall. 
E)  domestic prices fall. B

Question 3

What is the real exchange rate? What is its relationship to the current account?

Accepted Answer

Defined as: EP/P (the exchange rate multiplied by foreign prices, divided by domestic prices).
While the nominal exchange rate measures how much of a foreign currency one can buy with a unit of domestic currency, the real exchange rate measures how many goods and services one could buy.
A rise in the real exchange rate (a depreciation of domestic currency) means that domestic goods are cheaper compared to foreign goods, so exports increase and imports decrease. Aggregate demand increases and the CA rises. A fall in the real exchange rate has the opposite effect: Aggregate demand decreases and the CA falls.

Question 4

Fill in the following table.

Accepted Answer

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

Question 5

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 6

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 7

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 8

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 9

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 10

Discuss the main factors affecting the position of the DD schedule.

Accepted Answer

The level of government demand

Question 11

Explain how the AA schedule is derived.

Accepted Answer

For a fixed real money supply, an increa

Question 12

In the short-run, an increase in government purchases causes

Accepted Answer

A)  a shift of the DD curve to the left, output increases 
B)  a shift of the DD curve to the right, output decreases 
C)  a shift of the DD curve to the left, output decreases 
D)  a shift of the DD curve to the right, output increases 
E)  a shift of the DD curve upwards, supply increases 
A)  a shift of the DD curve to the left, output increases 
B)  a shift of the DD curve to the right, output decreases 
C)  a shift of the DD curve to the left, output decreases 
D)  a shift of the DD curve to the right, output increases 
E)  a shift of the DD curve upwards, supply increases

Question 13

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 14

Find the real exchange rate for the following case: Assume that the representative basket of European goods and services costs 40 euros and 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

[(0.9 $/euro) (40 eu

Question 15

Explain the following figure:

Accepted Answer

The figure depicts the effect of a perma

Question 16

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 17

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 18

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 19

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 $90, and the dollar/euro exchange rate is $0.80 per euro, then the price of the European basket in terms of U.S. basket is:

Accepted Answer

[(0.80 $/euro) (150 euro per a

Question 20

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

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

Explain what are the factors that shift the AA Schedule?

The current account increases when

What is the real exchange rate? What is its relationship to the current account?

Fill in the following table.

Which one of the following statements is the most accurate?

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

Which of the following is the most accurate?

The real exchange rate, q, is defined as

Which one of the following statements is most accurate?

Discuss the main factors affecting the position of the DD schedule.

Explain how the AA schedule is derived.

In the short-run, an increase in government purchases causes

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.

Explain the following figure:

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

When the real exchange rate rises,

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

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 $90, and the dollar/euro exchange rate is $0.80 per euro, then the price of the European basket in terms of U.S. basket is:

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

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

Optimum Currency Areas and the European Experience

Financial Globalization: Opportunity and Crisis

Developing Countries: Growth, Crisis, and Reform

Filters