Deck 27: Prices and Output in the Open Economy: Aggregate Supply and Demand

Question 1

When a country is in equilibrium on its long-run aggregate supply curve, the actual price level facing economic agents

A) is greater than the price level expected by economic agents.
B) is equal to the price level expected by economic agents.
C) is less than the price level expected by economic agents.
D) is greater than, equal to, or less than the price level expected by economic agents -
Cannot be determined without more information.

Answer 1

B

Question 2

Many positive investment opportunities with higher expected rates of return have recently been opening up in Central, Eastern, and Western Europe. Explain the effects that such opportunities might have on U.S. financial markets and economic activity, using the AD/AS framework. Will this have inflationary or deflationary effects on the United States? Why? What problems might occur if the U.S. government attempts to offset the short-run price effects of this external phenomenon?

Answer 2

not answered

Question 3

In the aggregate demand/aggregate supply framework

A) neither expansionary fiscal nor expansionary monetary policy has a permanent impact
On the natural level of income and employment.
B) only monetary policy has a long-run impact on income and unemployment under
Flexible exchange rates.
C) only fiscal policy has a long-run impact on income and employment under flexible
Exchange rates.
D) only monetary policy has a short-run impact on income and employment under fixed
Exchange rates.

Answer 3

A

Question 4

Other things equal, a rise in foreign interest rates leads to __________ in the home Country's equilibrium level of income and to __________ in the home country's price Level in the short run.

A) a rise; a fall
B) a rise; no change
C) no change; a fall
D) a rise; a rise

Question 5

In a situation of stagflation, the use of aggregate demand-oriented macro policy to address the problem of the rising price level would, at least in the short run, __________ the price level and __________ the level of output in the economy.

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

Question 6

Suppose that there is an exogenous increase in foreign prices. Using the AD/AS framework, explain how this would affect the domestic economy under fixed exchange rates and under flexible exchange rates. Would your answer be different if there were no imported inputs into the production process? Why or why not?

Question 7

It has been argued that one advantage of fixed exchange rates is that they promote price discipline or price stability between trading partners. Is this argument supported by the AD/AS framework? Why or why not?

Question 8

What effect does opening the economy have on the aggregate demand curve? The aggregate supply curve? Is it possible that the long-run supply curve will shift to the right more rapidly in the open economy than in the closed economy? Why or why not?

Question 9

An increase in the long-run equilibrium level of income can result from

A) improved technology.
B) adoption of improved management techniques.
C) a larger capital stock.
D) all of the above.

Question 10

Suppose that, in a world of flexible wages and prices, there is a sudden autonomous increase in the flow of short-term financial capital into country A. Will the impact on country A's aggregate demand (AD) curve and hence on output in the short run be different in if A has a flexible exchange rate rather than a fixed exchange rate? Explain.

Question 11

Suppose that a partner country autonomously increases its demand for the home country's exports. With a fixed exchange system, this increase in export demand __________; with a flexible exchange rate system, this increase in export demand __________.

A) will shift the home country's AD curve to the right; also will shift the home country's
AD curve to the right.
B) will shift the home country's AD curve to the right; will not shift the home country's
AD curve.
C) will not shift the home country's AD curve; will shift the home country's AD curve to
The right
D) will not shift the home country's AD curve; also will not shift the home country's AD
Curve

Question 12

If the AD curve intersects the short-run aggregate supply curve to the left of the long-run aggregate supply curve, under flexible exchange rates, then the long-run equilibrium position

A) can be attained if labor adjusts its wages downward due to prices being lower than
Expected.
B) can be attained by a decrease in government spending.
C) can be attained by contracting the money supply.
D) cannot be attained without a change in technology.

Question 13

Other things equal, with imported intermediate goods, an increase in foreign prices will lead to a __________ shift in a home country's short-run aggregate supply curve and
__________ shift in the home country's aggregate demand curve.

A) leftward; also to a leftward
B) leftward; to a rightward
C) rightward; to a leftward
D) rightward; also to a rightward

Question 14

In considering the slope of the open-economy aggregate demand curve (AD), a valid general statement is that, other things equal, the open-economy AD __________.

A) will tend to be flatter with flexible rates than with fixed rates
B) will tend to be steeper with flexible rates than with fixed rates
C) will necessarily have the same slope with flexible rates as with fixed rates
D) will tend to be flatter or steeper, or will necessarily have the same slope, with flexible rates as with fixed rates - cannot be determined without more information.

Question 15

If a country's currency depreciates in the foreign exchange markets, the result will be a shift of the aggregate demand curve __________; in addition, if intermediate goods are an important component of the country's imports, the short-run aggregate supply curve __________.

A) to the left; also will shift to the left
B) to the left; will shift to the right
C) to the right; will shift to the left
D) to the right; also will shift to the right

Question 16

Expansionary aggregate demand-oriented fiscal policy leads, ceteris paribus, to

A) a short-run fall in both income and the price level.
B) a short-run rise in income and a fall in the price level.
C) no change in the long-run equilibrium level of income and to an increase in the price Level.
D) both an increase in the long-run equilibrium level of income and an increase in the Price level.

Question 17

In the AD/AS framework, when the economy is in long-run equilibrium,

A) inflation is occurring.
B) the entire labor force is employed.
C) actual prices are equal to expected prices.
D) actual levels of income and employment are less than the natural levels of income and
Employment.

Question 18

Stagflation can result

A) from an increase in the price of foreign-produced inputs.
B) from a fall in aggregate demand.
C) whenever an economy has completely flexible money wages and prices.
D) from a rightward shift of the short-run aggregate supply curve.

Question 19

Suppose that the government attempts to stimulate income and employment by using monetary policy. Explain how this will affect the economy in the short run and the long run. What must occur for this policy action to have a permanent impact on income and employment? How might this occur?

Question 20

If actual prices in a country are less than the expected prices in the country, then the country's

A) aggregate demand curve will shift to the left.
B) aggregate demand curve will shift to the right.
C) short-run aggregate supply curve will shift to the left.
D) short-run aggregate supply curve will shift to the right.

Question 21

The derivation of the aggregate demand curve (AD) in the closed economy builds upon the fact that, as the domestic price level rises, other things equal, the

A) LM curve shifts to the left.
B) LM curve shifts to the right.
C) IS curve shifts to the left.
D) IS curve shifts to the right.

Question 22

If exchange rates are fixed, an increase in the money supply will lead to __________ in The equilibrium level of income and to __________ in the price level.

A) an increase; no change
B) no change; no change
C) an increase; a decrease
D) an increase; an increase

Question 23

The derivation of the aggregate demand curve (AD) in the open economy builds upon the Fact that, as the price level rises, other things equal,

A) the LM curve shifts to the left but the IS and BP curves do not shift.
B) the LM and BP curves shift to the left but the IS curve does not shift.
C) the IS and LM curves shift to the left but the BP curve does not shift.
D) the IS, LM, and BP curves all shift to the left.

Question 24

Appreciation of the domestic currency will

A) increase domestic aggregate demand.
B) decrease domestic aggregate supply.
C) decrease domestic aggregate demand, and possibly increase domestic aggregate
Supply.
D) cause a deterioration in the trade balance, but have no effect on aggregate supply or
Demand.

Question 25

In a situation of stagflation, the use of aggregate demand-oriented macro policy to address the problem of unemployment would, at least in the short run, __________ the price level and __________ the level of output in the economy.

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

Question 26

An expansion of the domestic money supply

A) will increase aggregate demand under a fixed rate system.
B) will have no effect on aggregate demand under a flexible rate system.
C) will lead to an inflow of short-term capital under fixed exchange rates.
D) will lead to an expansion of aggregate demand and to upward pressure on domestic
Prices under a flexible rate system.

Question 27

According to the New Classical economists, with rational expectations, an increase in the money supply will

A) lead only to an increase in prices in both the short run and the long run.
B) lead to an increase in the equilibrium level of income in the short run but to no change In the equilibrium level of income in the long run.
C) lead to a fall in prices but to no change in money wages.
D) lead to a rightward shift in the long-run aggregate supply curve.

Question 28

The derivation of the aggregate demand curve (AD) in the closed economy builds upon the fact that, as the domestic price level rises, other things equal, the equilibrium level of income in the IS/LM diagram __________.

A) rises
B) is unchanged
C) falls
D) rises, is unchanged, or falls - cannot be determined without more information