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Other things the same, if the dollar depreciates relative to the Japanese yen, then
the exchange rate falls. It will cost fewer yen to travel in the U.S
You are planning a graduation trip to Nepal. Other things the same, if the dollar appreciates relative to the Nepalese rupee, then
the dollar buys more rupees. Your purchases in Nepal will require fewer dollars.
A country sells more to foreign countries than it buys from them. It has
a trade surplus and positive net exports
If purchasing-power parity holds, a dollar will buy
enough foreign currency to buy as many goods as it does in the United States.
One year a country has negative net exports. The next year it still has negative net exports and imports have risen more than exports
its trade deficit rose
Which of the following does purchasing-power parity imply?
The purchasing power of the dollar is the same in the U.S. as in foreign countries.
Which of the following does purchasing-power parity imply?
The nominal exchange rate is the ratio of foreign prices to U.S. prices.
According to purchasing-power parity, which of the following necessarily equals the ratio of the foreign price level divided by the domestic price level?
the nominal exchange rate, but not the real exchange rate
The theory of purchasing-power parity primarily explains
the determination of the real exchange rate
According to purchasing power parity, if the same basket of goods costs $100 in the U.S. and 50 pounds in Britain, then what is the nominal exchange rate?
1/2 pound per dollar
Suppose that a country imports $75 million of goods and services and exports $100 million of goods and services. What is the value of net exports?
According to purchasing-power parity, if a basket of goods costs $100 in the U.S. and the same basket costs 800 pesos in Argentina, then what is the nominal exchange rate?
8 pesos per dollar
The real exchange rate is the nominal exchange rate, defined as foreign currency per dollar, times
prices in the United States divided by foreign prices.
If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as
If purchasing power parity holds, the price level in the U.S. is 120, and the price level in Canada is 140, which of the following is true?
the nominal exchange rate is 140/120
If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $2 in the U.S. and 6 pesos in Argentina what is the real exchange rate?
It costs $80 for a dental appointment in the U.S. It costs 600 Egyptian pounds for the same appointment in Egypt. The nominal exchange rate is 7 pounds per dollar. The real exchange rate is
less than one. Dental appointments in Egypt are more expensive than in the U.S.
In the open-economy macroeconomic model, the key determinant of net capital outflow is the
real interest rate
Because a government budget deficit represents
negative public saving, it decreases national saving.
When the U.S. real interest rate falls, owning U.S. assets becomes
less attractive to both U.S. residents and foreign residents.
The open-economy macroeconomic model examines the determination of
the trade balance and the exchange rate
When a government increases its budget deficit, then that country's
supply of loanable funds shifts left
The open-economy macroeconomic model includes
both the market for loanable funds and the market for foreign-currency exchange.
A rise in the budget deficit
shifts both the supply of loanable funds in the market for loanable funds and the supply of dollars in the market for foreign-currency exchange left.
In the open-economy macroeconomic model, which of the following increases net capital outflow?
a fall in the real interest rate, but not a fall in the real exchange rate
Which of the following is correct concerning the open-economy macroeconomic model?
The net-capital-outflow curve slopes downward
If a country went from a government budget deficit to a surplus, national saving would
increase, shifting the supply of loanable funds right.
If the exchange rate rises, which of the following falls in the open-economy macroeconomic model?
desired net exports but not desired net capital outflow
Other things the same, people in the U.S. would want to save more if the real interest rate in the U.S.
rose. The increased saving would increase the quantity of loanable funds supplied.
The explanation for the slope of
the supply of loanable funds curve is based on the logic that a higher real interest rate leads to higher saving
A country has national saving of $60 billion, government expenditures of $30 billion, domestic investment of $40 billion, and net capital outflow of $20 billion. What is its supply of loanable funds?
U.S. net capital outflow
s a part of the demand for loanable funds, and the source of the supply of dollars in the foreign exchange market
In an open economy, the demand for loanable funds comes from
those who want to borrow funds to buy either domestic capital goods or foreign assets
If a country raises its budget deficit, then in the market for foreign-currency exchange
supply shifts left.
If a country has a positive net capital outflow, then
on net it is purchasing assets from abroad. This adds to its demand for domestically generated loanable funds.
If a country has a negative net capital outflow, then
on net other countries are purchasing assets from it. This subtracts from its demand for domestically generated loanable funds.
If U.S. residents want to buy more foreign bonds, then in the market for foreign-currency exchange the exchange rate
falls and the quantity of dollars traded rises.
In the open-economy macroeconomic model, if a country's interest rate rises, its net capital outflow
falls and the real exchange rate rises.
In the open-economy macroeconomic model, if the supply of loanable funds shifts right, then
the supply of dollars in the market for foreign-currency exchange shifts right
In the open-economy macroeconomic model, if the supply of loanable funds shifts right
the interest rate falls and the supply of dollars in the market for foreign-currency exchange shifts right.
The aggregate demand and aggregate supply graph has the
quantity of output on the horizontal axis. Output is best measured by real GDP
When we say that economic fluctuations are "irregular and unpredictable," we mean that
recessions do not occur at regular intervals.
The long-run aggregate supply curve
indicates monetary neutrality in the long run, is a graphical representation of the classical dichotomy, and is vertical
The aggregate-demand curve
shows an inverse relation between the price level and the quantity of all goods and services demanded
Which of the following would cause prices and real GDP to rise in the short run?
aggregate demand shifts right
Which of the following is correct?
The long-run, but not the short-run, aggregate supply curve is consistent with the idea that nominal variables do not affect real variables
Which of the following is included in the aggregate demand for goods and services?
consumption demand, net exports, and investment demand
Which of the following would cause prices to fall and output to rise in the short run?
short-run aggregate supply shifts right
The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change
in the price level, but not output.
When the price level falls the quantity of
consumption goods demanded and the quantity of net exports demanded both rise.
The long-run aggregate supply curve would shift right if immigration from abroad
increased or Congress abolished the minimum wage.
If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level
is lower and output is the same as the original long-run equilibrium.
The classical model is appropriate for analysis of the economy in the
long run, since real and nominal variables are essentially determined separately in the long run.
In which case can we be sure that real GDP rises in the short run?
foreign economies expand and the money supply increases
Which of the following shifts long-run aggregate supply right?
an increase in either the physical or human capital stock
The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for
the slope of the aggregate-demand curve
The discovery of a large amount of previously-undiscovered oil in the U.S. would shift
the long-run aggregate-supply curve to the right.
Changes in the price level affect which components of aggregate demand?
consumption, investment, and net exports
An economic contraction caused by a shift in aggregate demand remedies itself over time as the expected price level
falls, shifting aggregate supply right.
If aggregate demand shifts right then in the short run
firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left.
An economic contraction caused by a shift in aggregate demand causes prices to
fall in the short run, and fall even more in the long run.
Shifts in the aggregate-demand curve can cause fluctuations in
the level of output and in the level of prices
Fiscal policy refers to the idea that aggregate demand is affected by changes in
government spending and taxes
When Congress reduces spending in order to balance the government's budget, it needs to consider
both the short-run effects on aggregate demand and aggregate supply, and the long-run effects on saving and growth
The marginal propensity to consume (MPC) is defined as the fraction of
extra income that a household consumes rather than saves.
The Kennedy tax cut of 1964 was
designed to shift the aggregate demand curve to the right., designed to shift the aggregate supply curve to the right, and successful in stimulating the economy
When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right.
Using the liquidity-preference model, when the Federal Reserve increases the money supply,
the equilibrium interest rate decreases.
A reduction in U.S net exports would shift U.S. aggregate demand
leftward. In an attempt to stabilize the economy, the government could cut taxes
The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?
increase government expenditures or increase the money supply
Suppose aggregate demand shifts to the left and policymakers want to stabilize output. What can they do?
institute an investment tax credit or increase the money supply
Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?
Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?
increase government expenditures
Some economists argue that
fiscal policy should actively be used to stabilize the economy, monetary policy should actively be used to stabilize the economy, and fiscal policy can be used to shift the AD curve
Critics of stabilization policy argue that
the impact of policy may last longer than the problem it was designed to offset, there is a lag between the time policy is passed and the time policy has an impact on the economy, policy can be a source of, instead of a cure for, economic fluctuations
The lag problem associated with monetary policy is due mostly to
the fact that business firms make investment plans far in advance
According to the theory of liquidity preference, the money supply
is independent of the interest rate, while money demand is negatively related to the interest rate
When the price level rises, the number of dollars needed to buy a representative basket of goods
increases, and so the value of money falls.
In which of the following cases was the inflation rate 10 percent over the last year
One year ago the price index had a value of 120 and now it has a value of 132
If the CPI rises, the number of dollars needed to buy a representative basket of goods
increases, and so the value of money falls.
The value of money falls as the price level
rises, because the number of dollars needed to buy a representative basket of goods rises.
Assuming the Fisher Effect holds, and given U.S. tax laws, an increase in inflation
does not change the real interest rate but reduces the after-tax real rate of interest
The price level rises if either
money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a fall in the value of money
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