HOMEWORK 9 (CHAPTER 17 OUTPUT AND THE EXCHANGE RATE IN THE SHORT RUN) ECO41 FALL 2015
UDAYAN ROY
Each correct answer is worth 1 point. The maximum score is 20 points. This homework is due in class
on Monday, December 7. Please show your answers on the answer sheet (on the last page).
1. In the short-run international macroeconomic theory developed in class, the DD curve shows all
combinations of _____ at which the _____ market is in equilibrium?
a.
b.
c.
d.
e.
imports and exports; goods and services
exports and the exchange rate; foreign exchange market
foreign prices and the exchange rate; foreign exchange market
output and the exchange rate; goods and services
output and exports; goods and services
2. In the short-run international macroeconomic theory developed in the textbook, the AA curve
shows
a. interest rate and output combinations at which there is equilibrium in the domestic money
market and the foreign exchange market.
b. exchange rate and output combinations at which there is equilibrium in the foreign money
market and the domestic exchange market.
c. exchange rate and output combinations at which there is equilibrium in the domestic money
market and the foreign exchange market.
d. exchange rate and output combinations at which there is equilibrium in the domestic bond
market and the foreign asset market.
e. exchange rate and output combinations that are greater than equilibrium in the foreign money
market and the domestic exchange market.
3. Expansionary fiscal policy refers to:
a.
b.
c.
d.
e.
An increase in government spending and/or an increase in taxes
An increase in government spending and/or a decrease in taxes
A decrease in government spending and/or an increase in taxes
An increase in money supply
A decrease in money supply
4. In a country that has flexible exchange rates, contractionary monetary policy refers to:
a.
b.
c.
d.
e.
An increase in government spending and/or an increase in taxes
An increase in government spending and/or a decrease in taxes
A decrease in government spending and/or an increase in taxes
An increase in money supply
A decrease in money supply
5. The short-run effect of a tax cut in an economy that has a flexible exchange rate system can be
shown in the adjoining figure as a movement from:
a. Point 1 to Point 2. Therefore, output will decrease (Y↓) and
the domestic currency will depreciate (E↑).
b. Point 1 to Point 4. Therefore, output will decrease and the
domestic currency will appreciate.
c. Point 3 to Point 2. Therefore, output will increase and the
domestic currency will depreciate.
d. Point 3 to Point 4. Therefore, output will increase and the
domestic currency will appreciate.
6. The short-run effect of a decrease in government spending in an
economy that has a flexible exchange rate system can be shown
in the adjoining figure as a movement from
a.
b.
c.
d.
Point 1 to Point 2. Therefore, output will decrease and the domestic currency will depreciate.
Point 1 to Point 4. Therefore, output will decrease and the domestic currency will appreciate.
Point 3 to Point 2. Therefore, output will increase and the domestic currency will depreciate.
Point 3 to Point 4. Therefore, output will increase and the domestic currency will appreciate.
7. The economy is in recession, GNP is falling and unemployment is soaring. You are the president’s
economic adviser. The president faces a tough re-election campaign and wants a quick increase in
GNP. Based on the AA-DD analysis that was discussed in class, what policies would you recommend
to her?
a.
b.
c.
d.
e.
Cut taxes
Increase government spending
Increase the money supply
Raise tariffs on imported goods
Any or all of the above
8. You are the president’s economic adviser. The president faces a tough re-election campaign and
wants a quick increase in the nation’s current account balance (CA). Based on the AA-DD analysis
that was discussed in class, what policies would you recommend to her?
a.
b.
c.
d.
e.
Expansionary fiscal policy
Contractionary fiscal policy (also called, “fiscal austerity”)
Expansionary monetary policy
Contractionary monetary policy
Both (b) and (c) would be good advice
9. How does an increase in the real exchange rate affect exports and imports? (Hint: Read the section
in Ch. 17 of the textbook with the title “How Real Exchange rate Changes Affect the Current
Account”.)
a.
b.
c.
d.
Exports increase; imports decrease.
Exports decrease; imports increase.
Exports increase; imports change ambiguously.
Exports change ambiguously; imports decrease.
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e. Exports increase; imports are constant.
10. How does a rise in real income affect aggregate demand?
a.
b.
c.
d.
e.
Y  Yd Im CA AD , but Y  Yd  C  AD  by more
Y  Yd Im CA AD , but Y  Yd  C  AD  by more
Y  Yd Im CA AD , and Y  Yd  C  AD 
Y  Yd Im CA AD , but Y  Yd  C  AD  by less
Y  Yd Im CA AD , but Y  Yd  C  AD  by less
11. Which of the following are true statements about the current account balance (CA)?
a.
b.
c.
d.
e.
Monetary expansion increases the current account balance.
Monetary expansion decreases the current account balance.
Fiscal expansion increases the current account balance.
Fiscal expansion decreases the current account balance.
Both (a) and (d)
12. In the short run, what would be the effect of an increase in government spending?
a.
b.
c.
d.
e.
It will increase domestic output and appreciate the domestic currency.
It will increase domestic output and depreciate the domestic currency.
It will decrease domestic output and appreciate the domestic currency.
It will decrease domestic output and depreciate the domestic currency.
None of the above.
13. Which one of the following statements is the most accurate?
a.
b.
c.
d.
e.
An increase in disposable income (Yd = Y – T) improves the current account.
An increase in disposable income does not affect the current account.
An increase in disposable income worsens the current account.
An increase in income worsens the current account.
An increase in income improves the current account.
14. In the short-run, a temporary increase in the money supply
a.
b.
c.
d.
e.
Shifts the AA curve to the right, increases output and depreciates the domestic currency
Shifts the AA curve to the left, increases output and depreciates the domestic currency
Shifts the AA curve to the left, decreases output and depreciates the domestic currency
Shifts the AA curve to the left, increases output and appreciates the domestic currency
Shifts the AA curve to the right, increases output and appreciates the domestic currency
15. In the short-run, a temporary increase in fiscal policy causes
a.
b.
c.
d.
A shift of the DD curve to the left, output increases and the domestic currency appreciates
A shift of the DD curve to the right, output decreases and the domestic currency appreciates
A shift of the DD curve to the right, output increases and the domestic currency depreciates
A shift of the DD curve to the left, output decreases and the domestic currency depreciates
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e. A shift of the DD curve to the right, output increases and the domestic currency appreciates
16. 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.
17. In the short run, a permanent increase in the domestic money supply causes
a.
b.
c.
d.
e.
an upward shift in the DD curve that is greater than that caused by an equal but temporary increase
a downward shift in the AA curve that is greater than that caused by an equal but temporary increase
an upward shift in the AA curve which is smaller than that caused by an equal but temporary increase
a downward shift in the AA curve which is smaller than that caused by an equal but temporary increase
an upward shift in the AA curve which is greater than that caused by an equal but temporary increase
18. In the short run, a permanent increase in the domestic money supply
a.
b.
c.
d.
e.
Has stronger effects on the exchange rate and output than an equal temporary increase
Has stronger effects only on the exchange rate but not on output than an equal temporary increase
Has weaker effects on the exchange rate and output than an equal temporary increase
Has stronger effects on output, but lower effect the exchange rate than an equal temporary increase
None of the above.
19. The DD schedule shows all combinations of which two variables so that the output market is in
equilibrium?
a.
b.
c.
d.
e.
Imports and exports.
Exports and the exchange rate.
Foreign prices and the exchange rate.
Output and the exchange rate.
Output and exports.
20. How is the AA schedule derived?
a. It is derived by the schedule of interest rate and output combinations that are consistent with
equilibrium in the domestic money market and the foreign exchange market.
b. It is derived by the schedule of exchange rate and output combinations that are consistent with
equilibrium in the foreign money market and the domestic exchange market.
c. It is derived by the schedule of exchange rate and output combinations that are consistent with
equilibrium in the domestic money market and the foreign exchange market.
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d. It is derived by the schedule of exchange rate and output combinations that are consistent with
equilibrium in the domestic bond market and the foreign asset market.
e. None of the above.
21. According to the AA-DD model of international macroeconomics discussed in class, expansionary
monetary policy ____ and expansionary fiscal policy ___ the nominal interest rate (R).
a.
b.
c.
d.
Increases; increases
Increases; decreases
Decreases; increases
Decreases; decreases
22. According to the AA-DD model of international macroeconomics discussed in class, a temporary
increase in foreign GNP will affect the domestic economy as follows:
a. The DD curve will shift right. Domestic GNP will increase (Y↑) and the exchange rate of the
foreign currency will decrease (E↓). The domestic interest rate will increase (R↑), and the
domestic economy’s net exports will decrease (CA↓).
b. The DD curve will shift right. Y↓, E↑, R↓, and CA↑.
c. The DD curve will shift left. Y↓, E↑, R↓, and CA↑.
d. The AA curve will shift right. Y↑, E↑, R↓, and CA↑.
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ANSWER SHEET HOMEWORK 9 (Ch. 17) ECO41 FALL 2015 UDAYAN ROY
NAME: _______________________________________
DATE: ________________________________________
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