Question 1

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

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Question 2

Find the real exchange rate for the following case: Assume that the representative basket of European goods and services costs 40 euros and the representative U.S. basket costs $50, and the dollar/euro exchange rate is $0.90 per euro, then the price of the European basket in terms of U.S. basket is ________.

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Question 3

What is an accurate implication resulting from an increase in income?
A) an increase in exchange rate
B) a decrease in exchange rate
C) a decrease in consumption
D) a decrease in output
E) an increase in consumption

Accepted Answer

An increase in income would lead to an increase in consumption because individuals and households would have more disposable income to spend on goods and services.

Question 4

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:

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Question 5

A country's domestic currency's real exchange rate, q, is best described by
A) the price of similar goods in the same market.
B) the price of the domestic basket in terms of the foreign one.
C) the price of a domestic basket.
D) the price of the foreign basket in terms of the domestic basket.
E) the price of different goods baskets in the same market.

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Question 6

Why is the economy at full employment in the long run?
A) Only wages have the ability to adjust.
B) Only price can adjust.
C) Prices don't adjust.
D) Wages and the price level eventually adjust to full employment equilibrium levels.
E) Government policies eventually converge on the full employment strategy.

Accepted Answer

In the long run, both wages and prices have the ability to adjust, allowing the economy to eventually reach full employment equilibrium levels. As wages adjust, the cost of production for firms decreases, leading to lower prices. As prices decrease, consumers have more purchasing power, leading to an increase in demand for goods and services. This increase in demand then leads to an increase in production and employment, ultimately resulting in a full employment equilibrium.

Question 7

What have we assumed when we conclude that a real depreciation of the currency improves the current account?
A) The volume effect outweighs the value effect.
B) The value effect outweighs the volume effect.
C) All else equal and the volume effect outweighs the value effect.
D) All else equal and the value effect outweighs the volume effect.
E) All else equal and the volume effect equals the value effect.

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Question 8

Find the real exchange rate for the following case: Assume that the representative basket of European goods costs 100 euros and the representative U.S. basket costs $125, and the dollar/euro exchange rate is $0.75 per euro, then the price of the European basket in terms of U.S. basket is:

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Question 9

Which one of the following statements is MOST accurate?
A) In the long run, foreign output depends only on the available domestic supplies of factors of production.
B) In the short run, domestic output depends only on the available domestic supplies of factors of production.
C) In the long run, domestic output depends only on the available domestic supplies of factors of production.
D) In the long run and in the short run, domestic output depends only on the available domestic supplies of factors of production.
E) In the long run, domestic output depends only on the real exchange rate.

Accepted Answer

In the long run, domestic output depends only on the available domestic supplies of factors of production. This is because in the long run, factors of production can be adjusted and increased to reach maximum output. The inputs used for production (such as labor and capital) are assumed to be mobile in the long run, so the economy can adjust to reach its potential output given its available resources. In the short run, production may be limited by the available resources, but in the long run, the economy can adjust to reach its maximum potential output given its available factors of production. Foreign output may depend on domestic supplies of factors of production, but this question is asking specifically about domestic output. The real exchange rate may affect the competitiveness of domestic goods in foreign markets in the long run, but it is not the only determinant of domestic output.

Question 10

The aggregate demand for home input can be written as a function of: I. Real exchange rate.
II) Government spending.
III) Disposable income.
A) I only
B) III only
C) I and III
D) II and III
E) I, II, and III

Accepted Answer

The aggregate demand for home input is influenced by the real exchange rate, government spending, and disposable income. The real exchange rate affects the competitiveness of home goods versus foreign goods, government spending directly influences aggregate demand, and disposable income affects consumer spending.

Question 11

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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Question 12

Fill in the following table.

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Question 13

Fill in the following table.

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Question 14

Which one of the following statements is the MOST accurate?
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.

Accepted Answer

A rise in domestic real income raises aggregate demand for home output because individuals have more disposable income to spend and they increase their demand for domestically produced goods and services.

Question 15

How does a rise in real income affect aggregate demand?
A) Y ↑ implies Yd ↑ implies Im ↑ implies CA ↓ implies AD ↓, but Y ↑ implies Yd ↑ implies C ↑ implies AD ↑ by more.
B) Y ↑ implies Yd ↑ implies Im ↓ implies CA ↓ implies AD ↓, but Y ↑ implies Yd ↑ implies C ↑ implies AD ↑ by more.
C) Y ↑ implies Yd ↑ implies Im ↑ implies CA ↑ implies AD ↑, and Y ↑ implies Yd ↑ implies C ↑ implies AD ↑.
D) Y ↑ implies Yd ↑ implies Im ↑ implies CA ↓ implies AD ↓, but Y ↑ implies Yd ↑ implies C ↑ implies AD ↑ by less.
E) Y ↑ implies Yd ↑ implies Im ↓ implies CA ↓ implies AD ↓, but Y ↑ implies Yd ↑ implies C ↑ implies AD ↑ by less.

Accepted Answer

A rise in real income (Y) increases disposable income (Yd), which leads to an increase in consumption (C) and imports (Im). While increased imports can worsen the current account (CA), leading to a potential decrease in aggregate demand (AD), the increase in consumption has a more significant positive effect on AD, causing it to increase overall.

Question 16

Which one of the following statements is MOST accurate?
A) Factors of production can only be over-employed in the short run.
B) Factors of production can only be under-employed in the short run.
C) Factors of production can be over- or under-employed in the long run.
D) Factors of production can be over- or under-employed in the short run.
E) Factors of production are fully employed in the short run.

Accepted Answer

Factors of production can either be over-employed or under-employed in the short run. In the long run, adjustments can be made to ensure that factors of production are being used efficiently, but in the short run, it is common for firms to either increase or decrease the use of certain factors depending on their current needs and market conditions.

Question 17

What is the real exchange rate? What is its relationship to the current account?

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Question 18

Explain how does a rise in real income affect aggregate demand?

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Question 19

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 20

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 $200, and the dollar/euro exchange rate is $1.20 per euro, then the price of the European basket in terms of U.S. basket is:

Accepted Answer

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

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

What is an accurate implication resulting from an increase in income?

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:

A country's domestic currency's real exchange rate, q, is best described by

Why is the economy at full employment in the long run?

What have we assumed when we conclude that a real depreciation of the currency improves the current account?

Find the real exchange rate for the following case: Assume that the representative basket of European goods costs 100 euros and the representative U.S. basket costs $125, and the dollar/euro exchange rate is $0.75 per euro, then the price of the European basket in terms of U.S. basket is:

Which one of the following statements is MOST accurate?

The aggregate demand for home input can be written as a function of: I. Real exchange rate. II) Government spending. III) Disposable income.

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.

Fill in the following table.

Fill in the following table.

Which one of the following statements is the MOST accurate?

How does a rise in real income affect aggregate demand?

Which one of the following statements is MOST accurate?

What is the real exchange rate? What is its relationship to the current account?

Explain how does a rise in real income affect aggregate demand?

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

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 $200, and the dollar/euro exchange rate is $1.20 per euro, then the price of the European basket in terms of U.S. basket is: