Exam 18: Balance of Payments II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run

The final market price of imports may not reflect 100% of changes in the real effective exchange rate because:

If the supply of money increases, what happens in the IS-LM framework?

When a depreciation in the nation's real effective exchange rate initially lowers the trade balance and then increases it, economists refer to the phenomenon as:

When the real exchange rate decreases in the United States, then there is a(n) ______ in U.S. demand for U.S. goods and a(n) _________ in U.S. demand for Mexican goods.

Assume the economy is in equilibrium. If the interest rate falls, what sequence of events will return the economy to equilibrium?

At some rate of interest, i, domestic demand is equal to output, and at some exchange rate, the domestic return is equivalent to the foreign return. This must be one point on:

With expected inflation equal to zero in the model, investment activity for an economy is:

Suppose that the dollar real exchange rate falls by 10% against the euro, 20% against the pound, and 25% against the yen. If the United States trades equally with each country, what is the percentage decline in the real effective exchange rate?

If taxes fall and foreign income falls, what will happen to output, ceteris paribus?

When the marginal propensity to consume foreign imports (MPC_F) rises, ceteris paribus, what happens to the trade balance?

When the interest rate is so low that the opportunity cost of holding money is zero, then economists say we have reached:

What assumption results in investment depending only on the nominal interest rate?

There are a number of factors that can increase demand and affect the equilibrium level of total output and, therefore, affect the trade balance. Discuss several of these and indicate in which direction total demand would change, and in which direction the trade balance would change.