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Section II - Extra Study Questions III Answer Key.pdf

Section II - Extra Study Questions III Answer Key.pdf -...

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1 Middle East Technical University Fall, 2016 Department of Economics ECON 202 Section 2 Instructor: Dr. Pınar Derin - Güre TA: Özgen Öztürk This is NO homework. The purpose is just to provide you extra study material for the midterm exam. Try to solve these questions WITHOUT checking the answer key. Important Note: The level of difficulty of this problem set is not necessarily indicative of the level of difficulty of the midterm exam. PART 1 - TRUE/FALSE/UNCERTAIN QUESTIONS. State whether each of the following statements is True, False or Uncertain and justify your answer in 2-3 sentences. 1. A fiscal expansion tends to increase net exports. 2. Fiscal policy has a greater effect on output in an economy with fixed exchange rates than in an economy with flexible exchange rates. 3. Other things being equal, the interest parity condition implies that the domestic currency will appreciate in response to an increase in the expected exchange rate. 4. If financial investors expect the dollar to depreciate against the yen over the coming year, one year interest rate will be higher in the United States than in Japan. 5. If the Japanese interest rate is equal to zero, foreigners will not want to hold Japanese bonds. 6. Under fixed exchange rates, the money stock must be constant. PART II - ESSAY TYPE QUESTIONS. 1. Consider an open economy with flexible exchange rates. Suppose output is at the natural level, but there is a trade deficit. What is the appropriate fiscal and monetary policy mix. STUDY QUESTIONS #3
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2 2. Consider an economy that suffers a fall in business confidence. Let UIP stand for the uncovered interest parity condition. a. Suppose the economy has a flexible exchange rate. In an IS LM UIP diagram, show the short run effect of the fall in business confidence on output, the interest rate, and the exchange rate. How does the change in the exchange rate, by itself, tend to affect output? Does the change in the exchange rate dampen (make smaller) or
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