Question 1

Explain how an increase in government spending would affect the DD-AA schedule in the short run.

Accepted Answer

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Question 2

Which one of the following statements is the MOST accurate?

Accepted Answer

A) An increase in disposable income improves the current account. 
B) An increase in disposable income does not affect the current account. 
C) An increase in disposable income worsens the current account. 
D) An increase in income worsens the current account. 
E) An increase in income improves the current account.

Question 3

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 4

Imagine that the economy is at a point that is above 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 drop to a point on the AA schedule. 
C) The exchange rate will first move to a point on the DD schedule. 
D) The AA-DD equilibrium will shift to the position of the economy. 
E) The exchange rate will first move left to a position on the AA schedule.

Question 5

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.

Question 6

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.

Question 7

Monetary expansion causes the current account balance to increase in the short run.Discuss.Is the same the case for fiscal expansion?

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Question 8

According to historical data,what is the effect of a sharp change in the current account on the exchange rate (both in the short and long run)?

Accepted Answer

A) At first,home currency will depreciate as CA balance falls,but over time,currency will begin to depreciate. 
B) At first,home currency will appreciate as CA balance falls,but over time,currency will begin to depreciate. 
C) At first,home currency will appreciate as CA balance rises,but over time,currency will begin to depreciate. 
D) At first,home currency will depreciate as CA balance falls,but over time,currency will begin to appreciate. 
E) At first,home currency will appreciate as CA balance falls,but over time,currency will begin to appreciate.

Question 9

Show the effects of a permanent increase in the money supply.

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Question 10

Describe what is a J Curve?

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Question 11

Which of the following would cause the current account to decrease?

Accepted Answer

A) an increase in the nominal exchange rate,E 
B) an appreciation of the home currency 
C) an increase in disposable income 
D) an increase in foreign prices,P  
E) a decrease in domestic prices,P

Question 12

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

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Question 13

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 14

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.

Question 15

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 16

Fill in the following table.

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Question 17

If consumers experience an increase in lifetime income,current spending will ________,current saving will ________,and future spending will ________.

Accepted Answer

A) increase;increase;increase 
B) increase;decrease;decrease 
C) increase;decrease;increase 
D) increase;increase;decrease 
E) decrease;increase;increase

Question 18

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

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Question 19

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

Question 20

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.

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