Question 1

In the short run:
A) monetary expansion causes the CA increase & fiscal expansion causes the CA to decrease.
B) monetary expansion causes the CA to decrease & fiscal expansion causes the CA to decrease.
C) monetary expansion causes the CA to increase & fiscal expansion causes the CA to increase.
D) monetary expansion causes the CA to decrease & fiscal expansion causes the CA to increase.
E) monetary expansion causes the CA to increase & the effects of fiscal expansion are ambiguous.

Accepted Answer

In the short run, monetary expansion typically leads to currency depreciation, making exports cheaper and imports more expensive, thus increasing the current account (CA). Fiscal expansion often increases domestic demand, leading to higher imports and a decrease in the CA.

Question 2

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

Accepted Answer

Monetary expansion increases the money supply and can lead to a decrease in the exchange rate. A decrease in the exchange rate makes exports cheaper and more competitive, while imports become more expensive. Therefore, an increase in exports and decrease in imports will increase the current account balance.

Question 3

The Marshall-Lerner Condition states that, all else equal,
A) nominal appreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate.
B) real depreciation improves the current account if export and import volumes are sufficiently inelastic with respect to the real exchange rate.
C) real appreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate.
D) real depreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate.
E) the sum of import and export elasticities must be equal to one in order for depreciation to occur.

Accepted Answer

The Marshall-Lerner Condition states that a country's current account will improve following a real depreciation (i.e. the country's currency becoming less expensive relative to other currencies) if the sum of export and import elasticities is greater than one. This means that if a country's exports and imports are responsive to changes in the exchange rate (i.e. they are elastic), the improvement in the terms of trade from a real depreciation will lead to a greater increase in the value of exports and decrease in the value of imports, resulting in a positive impact on the current account. Therefore, real depreciation improves the current account if export and import volumes are sufficiently elastic with respect to the real exchange rate.

Question 4

Which one of the following statements is the most accurate?
A) Over time, the inflationary pressure that follows a temporary money supply expansion pushes the price level to its long-run value and returns the economy to full employment.
B) Over time, the inflationary pressure that follows a permanent money supply expansion pushes the price level to its long-run value and returns the economy to full employment.
C) Over time, the inflationary pressure that follows a temporary money supply expansion pushes the price level to its long-run value, but leaves the economy in a state of artificially low employment.
D) Over time, the inflationary pressure that follows a permanent money supply expansion pushes the price level to its long-run value, but leaves the economy in a state of artificially low employment.
E) Over time, the inflationary pressure that follows a permanent money supply expansion pushes the price level beyond its long-run value and lower the level of employment.

Accepted Answer

A permanent money supply expansion leads to a higher price level in the long run, but the economy adjusts back to full employment as wages and prices fully adjust.

Question 5

In the short run, a permanent increase in the domestic money supply
A) has stronger effects on the exchange rate and output than an equal temporary increase.
B) has stronger effects only on the exchange rate but not on output than an equal temporary increase.
C) has weaker effects on the exchange rate and output than an equal temporary increase.
D) has stronger effects on output, but lower effect the exchange rate than an equal temporary increase.
E) has weaker effects only on the exchange rate than an equal temporary increase.

Accepted Answer

A permanent increase in the domestic money supply has stronger effects on the exchange rate and output than an equal temporary increase. This is because a permanent increase in the money supply leads to a sustained increase in demand for domestic goods and services, resulting in a higher output level in the long run. However, this sustained increase in demand also leads to higher inflation expectations, which puts downward pressure on the domestic currency's value in the foreign exchange market. In contrast, a temporary increase in the money supply has less impact on output as it only leads to a short-lived increase in demand, but it still affects the exchange rate through the inflation expectations channel. Therefore, a permanent increase in the money supply has stronger effects on both output and the exchange rate than an equal temporary increase.

Question 6

In the short run, a permanent increase in the domestic money supply causes
A) a greater upward shift in the DD curve than that caused by an equal, but transitory, increase.
B) a greater downward shift in the AA curve than that caused by an equal, but transitory, increase.
C) an smaller upward shift in the AA curve than that caused by an equal, but transitory, increase.
D) a smaller downward shift in the AA curve than that caused by an equal, but transitory, increase.
E) a greater upward shift in the AA curve than that caused by an equal, but transitory, increase.

Accepted Answer

The answer of In the short run, a permanent increase...

Question 7

Which two time periods did the U.S. begin to experience a sharp increase in Current Account deficits?
A) 1981, mid-1990s
B) 1971, mid-1990s
C) 1961, mid-1990s
D) 1971, mid-1980s
E) 1985, mid-1990s

Accepted Answer

The answer of Which two time periods did the U.S....

Question 8

Which one of the following statements is the most accurate?
A) A permanent increase in the money supply cannot have any short-run effects.
B) A permanent increase in taxes cannot have any short-run effects.
C) A permanent decrease in the money supply cannot have short-run effects.
D) A permanent decrease in taxes cannot have short-run effects.
E) A permanent increase in money demand can be offset with a permanent increase in the money supply of equal magnitude.

Accepted Answer

A permanent increase in money demand can be offset with a permanent increase in the money supply of equal magnitude, as this would maintain the equilibrium in the money market, keeping interest rates and economic activity stable in the short run.

Question 9

Using the DD model, explain what happens to out put when Government demands increase. Use a figure to explain when it is taking place.

Accepted Answer

The answer of Using the DD model, explain what happens...

Question 10

The J-curve illustrates which of the following?
A) the effects of depreciation on the home country's economy
B) the immediate increase in current account caused by a currency depreciation
C) the gradual adjustment of home prices to a currency depreciation
D) the short-term effects of depreciation on the current account
E) the Keynesian view of international trade dynamics

Accepted Answer

The J-curve illustrates the short-term effects of a currency depreciation on the current account, showing an initial worsening of the current account balance followed by an improvement over the longer term.

Question 11

Demonstrate how a permanent fiscal expansion will not increase output in the long run.

Accepted Answer

The answer of Demonstrate how a permanent fiscal expansion will...

Question 12

In the long-run equilibrium, after a permanent money-supply increase there follows:
A) an increase in exchange rate, E.
B) a decrease in exchange rate, E.
C) an increase in output, Y.
D) a decrease in output, Y.
E) an unchanged exchange rate, E.

Accepted Answer

The answer of In the long-run equilibrium, after a permanent...

Question 13

A permanent increase in the domestic money supply
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.

Accepted Answer

A permanent increase in the domestic money supply typically leads to inflation, which reduces the value of the domestic currency. This results in a proportional rise in the exchange rate (E), where E represents the price of foreign currency in terms of the domestic currency. Consequently, the expected future exchange rate must also rise proportionally, reflecting the anticipated continued effect of the increased money supply on the currency's value.

Question 14

Using the DD-AA framework, show the phenomenon of overshooting. Use a figure to explain when it is taking place.

Accepted Answer

The answer of Using the DD-AA framework, show the phenomenon...

Question 15

Using the DD-AA framework, which one of the following statements is the most accurate?
A) Only monetary policy can bring the economy to full employment.
B) Only fiscal policy can bring the economy to full employment.
C) Only both monetary and fiscal policies can bring the economy to full employment.
D) Both policies are capable of bringing the economy to full employment and low inflation.
E) Monetary policy by itself or fiscal policy by itself can bring the economy to full employment.

Accepted Answer

The answer of Using the DD-AA framework, which one of...

Question 16

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)?
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.

Accepted Answer

The answer of According to historical data, what is the...

Question 17

Explain the following figure:

Accepted Answer

The answer of Explain the following figure: ...

Question 18

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

Accepted Answer

The answer of Show the effects of a permanent increase...

Question 19

Which of the following are true in terms of the current account balance?
A) Monetary expansion has no effect on the current account balance.
B) Monetary expansion decreases the current account balance.
C) Fiscal expansion increases the current account balance.
D) Fiscal expansion has no effect on the current account balance.
E) Monetary expansion increases the current account balance.

Accepted Answer

Monetary expansion increases the money supply and lowers interest rates, making exports more competitive and stimulating demand for domestically produced goods, leading to an increase in the current account balance.

Question 20

A permanent fiscal expansion
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, increasing output.
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.

Accepted Answer

The answer of A permanent fiscal expansion
A) shifts the DD...

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

In the short run:

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

The Marshall-Lerner Condition states that, all else equal,

Which one of the following statements is the most accurate?

In the short run, a permanent increase in the domestic money supply

In the short run, a permanent increase in the domestic money supply causes

Which two time periods did the U.S. begin to experience a sharp increase in Current Account deficits?

Which one of the following statements is the most accurate?

Using the DD model, explain what happens to out put when Government demands increase. Use a figure to explain when it is taking place.

The J-curve illustrates which of the following?

Demonstrate how a permanent fiscal expansion will not increase output in the long run.

In the long-run equilibrium, after a permanent money-supply increase there follows:

A permanent increase in the domestic money supply

Using the DD-AA framework, show the phenomenon of overshooting. Use a figure to explain when it is taking place.

Using the DD-AA framework, which one of the following statements is the most accurate?

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) ?

Explain the following figure:

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

Which of the following are true in terms of the current account balance?

A permanent fiscal expansion