chapter 16 - Chapter 16: Output and the Exchange Rate in...

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Chapter 16: Output and the Exchange Rate in the Short Run Multiple Choice Questions 1. How does an increase in the real exchange rate affect exports and imports? A. Exports increase; imports decrease B. Exports decrease; imports increase. C. Exports increase; imports change ambiguously. D. Exports change ambiguously; imports decrease. E. Exports increase; imports are constant. Answer: C 2. How does a rise in real income affect aggregate demand? A. Y Yd Im CA AD , but Y Yd C AD A by more. B. Y Yd Im CA AD , but Y Yd C AD A by more. C. Y Yd Im CA AD A , and Y Yd C AD A . D. Y Yd Im CA AD , but Y Yd C AD A by less. E. Y Yd Im CA AD , but Y Yd C AD A by less. Answer: A 3. Assume the economy is initially consuming along the inter-temporal budget constraint at point A, where no saving occurs. How does a fall in the real interest rate, r , affect present consumption? A. Present consumption decreases. B. Present consumption increases. C. Present consumption is unaffected. D. Present consumption’s change is ambiguous. E. Not enough information is provided. Answer: B 4. The J-curve illustrates which of the following? A. The effects of depreciation on the home country's economy B. The immediate increase in the 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
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E. The Keynesian view of international trade dynamics Answer: D 5. The IS-LM Model presented in Appendix I of Chapter 16 implies which of the following? A. Fiscal policy is effective in the short run. B. A permanent increase in the money supply is more effective than a temporary increase. C. The relationship between the exchange rate and the domestic output is negative. D. Fiscal policy may be effective only with a temporary increase in government spending. E. The exchange rate adjustment to a change in the home interest rate is permanent. Answer: D 6. The Marshall-Lerner Condition states that A. depreciation always has a favorable effect on the current account. B. import dependency reinforces the effects of depreciation on the current account. C. high elasticity of exports is sufficient for the favorable effects of depreciation on the current account to be observed. D. depreciation has a favorable effect on the current account only if the sum of export and import elasticities is greater than one. E. the sum of import and export elasticities must be equal to one in order for depreciation to occur. Answer: D 7. If the economy starts in long-run equilibrium, a permanent fiscal expansion will cause A. an increase in exchange rate, E. B. a decrease in exchange rate, E. C. an increase in output, Y.
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chapter 16 - Chapter 16: Output and the Exchange Rate in...

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