Question 1

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.

Question 2

Which one of the following statements is the MOST accurate?

Accepted Answer

A)  A rise in domestic real income raises aggregate demand for home output. 
B)  A rise in domestic real income decreases aggregate demand for home output because of the increase demand for import. 
C)  A rise in domestic real income keeps aggregate demand for home output at the same level. 
D)  It is difficult to tell whether a rise in domestic real income affects positively or negatively aggregate demand for home output. 
E)  A rise in domestic real income decreases aggregate demand for home output because the CA is raised.

Question 3

One implication of an empirical investigation of the Marshall-Lerner condition is that, in the ________, a real ________ in a nation's currency is likely to ________ the country's current account balance.

Accepted Answer

A)  long run; depreciation; improve 
B)  short run; depreciation; improve 
C)  long run; appreciation; improve 
D)  short run; appreciation; improve 
E)  short run but not the long run; appreciation; improve

Question 4

The current account balance is

Accepted Answer

A)  the supply of a country's exports less the country's own demand for imports. 
B)  the demand for a country's exports plus the country's own demand for imports. 
C)  the country's own demand for imports less the demand for a country's exports. 
D)  the demand for a country's exports less the country's own demand for imports. 
E)  the country's federal reserves minus the national debt.

Question 5

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.

Question 6

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 an 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 7

Which of the following is an example of an "unconventional monetary policy" by a central bank?

Accepted Answer

A)  the purchase of specific categories of assets with new money 
B)  the sale of long-term government bonds for foreign exchange 
C)  the purchase of long-term government bonds using foreign exchange 
D)  raising reserve requirements by commercial banks 
E)  selling gold reserves

Question 8

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

The answer of Find the real exchange rate for the...

Question 9

In the short run, a tax increase

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 DD curve to the left, decreases output and depreciates the currency.

Question 10

Explain the difference between the following two expressions:
Y = C(Yᵈ) + I + G + CA(EP/P*, Yᵈ) and
Y = C + I +G + CA

Accepted Answer

The answer of Explain the difference between the following two...

Question 11

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

Accepted Answer

The answer of Explain how does an increase in the...

Question 12

Assuming that the value effect dominates, the current account will increase if

Accepted Answer

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

Question 13

A permanent fiscal expansion

Accepted Answer

A)  shifts the DD and the AA schedules to the right, increasing output. 
B)  shifts the DD and the AA schedules to the right, decreasing output. 
C)  shifts the DD to the right and the AA schedule to the left, leaving output the same. 
D)  shifts the DD to the left and the AA schedule to the left, decreasing output. 
E)  shifts the DD and the AA schedules to the left, leaving output the same.

Question 14

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.

Question 15

Use a figure to study the following question: Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD, where both the output and asset markets are out of equilibrium. Explain what will happen next.

Accepted Answer

The answer of Use a figure to study the following...

Question 16

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

Accepted Answer

The answer of Discuss the main factors affecting the position...

Question 17

In the short run, any rise in the real exchange rate, EP/P*, will cause

Accepted Answer

A)  an upward shift in the aggregate demand function and a reduction in output. 
B)  an upward shift in the aggregate demand function and an expansion of output. 
C)  a downward shift in the aggregate demand function and an expansion of output. 
D)  an downward shift in the aggregate demand function and a reduction in output. 
E)  an upward shift in the aggregate demand function but leaves output intact.

Question 18

A country's domestic currency's real exchange rate, q, is defined as

Accepted Answer

A)  E. 
B)  E times P. 
C)  E times P*. 
D)  (E times P)/P*. 
E)  P*/(E times P).

Question 19

Imagine that the economy is at a point 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.

Question 20

What are two ways the government can maintain full employment in an open economy?
 Also give an example for each.

Accepted Answer

The answer of What are two ways the government can...

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

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

Which one of the following statements is the MOST accurate?

One implication of an empirical investigation of the Marshall-Lerner condition is that, in the , a real in a nation's currency is likely to the country's current account balance.

The current account balance is

A permanent increase in the domestic money supply

Which one of the following statements is the MOST accurate?

Which of the following is an example of an "unconventional monetary policy" by a central bank?

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:

In the short run, a tax increase

Explain the difference between the following two expressions: Y = C(Yᵈ) + I + G + CA(EP/P*, Yᵈ) and Y = C + I +G + CA

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

Assuming that the value effect dominates, the current account will increase if

A permanent fiscal expansion

Which one of the following statements is MOST accurate?

Use a figure to study the following question: Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD, where both the output and asset markets are out of equilibrium. Explain what will happen next.

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

In the short run, any rise in the real exchange rate, EP/P*, will cause

A country's domestic currency's real exchange rate, q, is defined as

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

What are two ways the government can maintain full employment in an open economy? Also give an example for each.