e202s7t3a - Eco 202 Final Exam Name_ 16 May 2007 Please...

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Eco 202 Name_______________________________ Final Exam 16 May 2007 Please write answers in ink . You may use a pencil to draw graphs. Allocate your time efficiently. 1. a. Suppose that money supply growth continues to be higher in Turkey than it is in the United States. What does purchasing-power parity imply will happen to the real and to the nominal exchange rate between the dollar and the euro? Higher money growth leads to higher prices, so prices will rise more in Turkey than in the United States. Under purchasing-power parity, this has no affect on the real exchange rate. However, in order for a dollar to buy as many goods in Turkey as it buys in the United States when prices are rising faster in Turkey, the nominal exchange rate must be rising so that a dollar buys more Turkish lira. b.Explain how the relation between the real exchange rate and net exports explains the downward slope of the demand for foreign-currency exchange curve. When the U.S. real exchange rate appreciates, U.S. goods become more expensive relative to foreign goods. This induces U.S. citizens to buy more goods overseas, which increases U.S. imports. The appreciation also induces foreign citizens to buy fewer U.S. goods, so U.S. exports fall. The decline in exports and increase in imports decreases net exports, and so the demand for U.S. dollars declines. The inverse relation between the exchange rate and the quantity of U.S. dollars demanded in the foreign-currency exchange market is represented by the downward-sloping demand curve. 2. Suppose that U.S. citizens start saving more, as younger Americans come to expect much lower Social Security benefits. What does this imply about the supply of loanable funds and the equilibrium real interest rate? What happens to the real exchange rate and net exports?
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3. Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve. Both reflect the classical dichotomy. The vertical long-run aggregate supply curve says that, in the long run, the economy will be at its natural rate of output, and that this is the same no matter what the price level. The natural rate of output depends on the natural rate of unemployment. The vertical Phillips curve says that, in the long run, the economy will be at the natural rate of unemployment (corresponding with the natural rate of output), and that this is the same no matter what the inflation rate. Both curves are consistent with the classical dichotomy that says real variables are not affected by nominal variables. 4.
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This note was uploaded on 04/10/2008 for the course ECON 202 taught by Professor Mcarthur during the Spring '06 term at Wofford.

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e202s7t3a - Eco 202 Final Exam Name_ 16 May 2007 Please...

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