Question 1

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

Accepted Answer

A rise in domestic real income, Y, leads to a rise in disposable income, Yd. This raises the spending on imports, IM, thus lowering the current account, CA, and reducing aggregate demand, AD. However, the rise in Yd also causes a rise in consumption, C, and raises aggregate demand, AD, by more than the corresponding decrease.

Question 2

What is the AA-curve? Why does it have a negative slope? What factors cause it to shift?

Accepted Answer

The AA-curve is the specific levels of E and Y under which the money and foreign exchange markets are in equilibrium.
The AA-curve has a negative slope because an increase in Y will cause E to fall (a domestic currency appreciation).
The factors that affect it are: the money supply, price level, expected exchange rate, foreign interest rates, and the level of real money demand.

Question 3

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

Accepted Answer

When the real exchange rate increases, domestic products are cheaper relative to foreign products. Due to this, exports increase as foreigners demand more of our exports. The change in imports is ambiguous because fewer units of imports are purchased (the volume effect), but each foreign unit is now more expensive (the value effect). Remember: exports and imports are measured in terms of domestic output, i.e. dollar value, not volume of units. However, we often assume that the volume effect outweighs the value effect, so that imports decrease when the real exchange rate rises.

Question 4

Which of the following have to be in equilibrium for the economy to be in equilibrium?

Accepted Answer

A)  the money market only 
B)  the goods market only 
C)  the output and asset markets 
D)  the savings and investment markets 
E)  the goods and output markets 
A)  the money market only 
B)  the goods market only 
C)  the output and asset markets 
D)  the savings and investment markets 
E)  the goods and output markets

Question 5

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 6

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

Accepted Answer

The figure below shows the G1

Question 7

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 8

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 9

What have we assumed when we conclude that a real depreciation of the currency improves the current account?

Accepted Answer

A)  The volume effect outweighs the value effect. 
B)  The value effect outweighs the volume effect. 
C)  All else equal and the volume effect outweighs the value effect. 
D)  All else equal and the value effect outweighs the volume effect. 
E)  All else equal and the volume effect equals the value effect. 
A)  The volume effect outweighs the value effect. 
B)  The value effect outweighs the volume effect. 
C)  All else equal and the volume effect outweighs the value effect. 
D)  All else equal and the value effect outweighs the volume effect. 
E)  All else equal and the volume effect equals the value effect.

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

What is an accurate implication resulting from an increase in income?

Accepted Answer

A)  an increase in exchange rate 
B)  a decrease in exchange rate 
C)  a decrease in consumption 
D)  a decrease in output 
E)  an increase in consumption 
A)  an increase in exchange rate 
B)  a decrease in exchange rate 
C)  a decrease in consumption 
D)  a decrease in output 
E)  an increase in consumption

Question 12

Which one of the following statements is MOST accurate?

Accepted Answer

A)  In general, consumption demand rises by less than disposable income. 
B)  In general, consumption demand rises by more than disposable income. 
C)  In general, consumption demand rises by more than income. 
D)  In general, consumption demand rises by the same amount as disposable income rises. 
E)  In general, consumption demand rises are unrelated to disposable income rises. 
A)  In general, consumption demand rises by less than disposable income. 
B)  In general, consumption demand rises by more than disposable income. 
C)  In general, consumption demand rises by more than income. 
D)  In general, consumption demand rises by the same amount as disposable income rises. 
E)  In general, consumption demand rises are unrelated to disposable income rises.

Question 13

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

Accepted Answer

Changes in the domestic money supply; ch

Question 14

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 15

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 16

When EP   /P rises

Accepted Answer

A)  IM will rise. 
B)  IM will fall. 
C)  IM may rise or fall. 
D)  IM is not affected. 
E)  IM and P* will both rise. 
A)  IM will rise. 
B)  IM will fall. 
C)  IM may rise or fall. 
D)  IM is not affected. 
E)  IM and P* will both rise.

Question 17

Explain the following figure:

Accepted Answer

The figure depicts the effect of a perma

Question 18

Temporary tax cuts would cause

Accepted Answer

A)  the AA-curve to shift left. 
B)  the AA-curve to shift right. 
C)  the DD-curve to shift left. 
D)  the DD-curve to shift right. 
E)  a shift in the AA-curve, although the direction is ambiguous. 
A)  the AA-curve to shift left. 
B)  the AA-curve to shift right. 
C)  the DD-curve to shift left. 
D)  the DD-curve to shift right. 
E)  a shift in the AA-curve, although the direction is ambiguous.

Question 19

The unique equilibrium output level in the short-run is found at the intersection of the following curves.

Accepted Answer

A)  aggregate demand and aggregate supply 
B)  aggregate demand and 45 degree line 
C)  aggregate supply and 45 degree line 
D)  aggregate demand and short-run aggregate supply 
E)  aggregate supply and long-run demand 
A)  aggregate demand and aggregate supply 
B)  aggregate demand and 45 degree line 
C)  aggregate supply and 45 degree line 
D)  aggregate demand and short-run aggregate supply 
E)  aggregate supply and long-run demand

Question 20

If an economy is in a liquidity trap, then the nominal interest rate is ________ and the only effective policy that can be used to stimulate the economy is ________.

Accepted Answer

A)  zero or negative; expansionary fiscal policy 
B)  zero or negative; expansionary monetary policy 
C)  high and rising; contractionary monetary policy 
D)  high and rising; expansionary monetary policy 
E)  high and rising; expansionary fiscal policy 
A)  zero or negative; expansionary fiscal policy 
B)  zero or negative; expansionary monetary policy 
C)  high and rising; contractionary monetary policy 
D)  high and rising; expansionary monetary policy 
E)  high and rising; expansionary fiscal policy

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

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

What is the AA-curve? Why does it have a negative slope? What factors cause it to shift?

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

Which of the following have to be in equilibrium for the economy to be in equilibrium?

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.

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

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.

How would you define a DD schedule?

What have we assumed when we conclude that a real depreciation of the currency improves the current account?

When the real exchange rate rises

What is an accurate implication resulting from an increase in income?

Which one of the following statements is MOST accurate?

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

What is the best way to describe aggregate demand?

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

When EP /P rises

Explain the following figure:

Temporary tax cuts would cause

The unique equilibrium output level in the short-run is found at the intersection of the following curves.

If an economy is in a liquidity trap, then the nominal interest rate is ________ and the only effective policy that can be used to stimulate the economy 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 an economy is in a liquidity trap, then the nominal interest rate is and the only effective policy that can be used to stimulate the economy is .