Mid 3 - Mid3 1 Assuming all other things equal what would...

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Mid 3  1.   Assuming all other things equal, what would happen to the U.S. dollar real exchange rate (does it appreciate or depreciate) under each of the following circumstances?
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a. The U.S . no min al exc han ge rate dep reci ates . b. U.S . do mes tic pric es incr eas e. c. Pric es in the rest of the wor ld rise .
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Student Response: a. The U.S. dollar real exchange rate depreciates. b. The U.S. dollar real exchange rate appreciates. c. The U.S. dollar real exchange rate depreciates. Sample Correct Answer
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a. Th e U. S. do lla r re al ex ch an ge rat e de pr ec iat es. b. Th e U. S. do lla r re al ex ch an ge rat e ap pr ec iat es. c. Th
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2.   Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve. Student Response: When the money supply increases, the interest rate falls. As the interest rate falls people will want to spend more and firms will want to build more factories and buy more capital goods. This increase in aggregate demand happens for any given price level, so aggregate demand shifts right. Sample Correct Answer When the money supply increases, the interest rate falls. As the interest rate falls people will want to spend more and firms will want to build more factories and buy more capital goods. This increase in aggregate demand happens for any given price level, so aggregate demand shifts right. General Feedback: When the money supply increases, the interest rate falls. As the interest rate falls people will want to spend more and firms will want to build more factories and buy more capital goods. This increase in aggregate demand happens for any given price level, so aggregate demand shifts right. 3.   Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to changes in investment and net exports? Student Response: When the price level increases, the purchasing power of money held in purses and bank accounts declines. This decline makes people feel less wealthy so that they lend less. The reduction in lending causes the interest rate to rise. The rise in interest rates discourages spending on investment goods so that the aggregate quantity of goods and services demanded decreases. As the interest rate increases, the supply of dollars in the market for foreign-currency exchange falls as people wish to purchase fewer foreign assets. This makes the dollar appreciate which
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Mid 3 - Mid3 1 Assuming all other things equal what would...

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