1. The speed at which we transition between the short run and the long run in ec
ID: 1103526 • Letter: 1
Question
1. The speed at which we transition between the short run and the long run in economics is determined by
A. How quickly interest rates change in the response to changes in the nominal money supply
B. The velocity of money
C. The flexibility of goods prices and wages
2. The current exchange rate between the Mexican peso and US dollar is 13 pesos per dollar. The general price level in the US is $250, while that in Mexico is 3000 pesos. According to the theory of Purchasing Power Parity, which of the following is most likely to occur?
A. The dollar will appreciate against the peso as Mexican consumers buy more goods imported from the US
B. The dollar will depreciate against the peso as American consumers buy more goods imported from Mexico
C. The dollar will depreciate against the peso as Mexican consumers buy more goods imported from the US
3. Suppose that absolute purchasing power parity golds between the US dollar and the European euro and that the money market is in equilibrium in both Europe and the United States. Which of the following events would lead to a ling run depreciation of the dollar against the euro?
A. A decrease in European output
B. A decrease in the European money supply
C. A decrease in the American money supply
4. Suppose that the elasticity of export supply is 0.6 and the elasticity of import demand (in absolute value) is 0.4. according to the Marshall-Lerner Condition, a depreciation of the home currency would cause…
A. No Change in the home country’s current account
B. The home country’s current account to decrease
C. An initial increase in the current account, then a decrease as the volume effect exceeds the value effect
5. In the short run, with prices fixed, how would a decrease in the foreign nominal money supply affect the exchange rate and output according to the DD-AA schedule?
A. It would increase home output and appreciate the home currency
B. It would decrease home output and appreciate the home currency
C. It would increase home output and depreciate the home currency.
6. Imagine that the economy is at a point on the DD-AA schedule that is below the AA curve and to the right of the DD curve, suggesting that both the output and asset markets are out of equilibrium. Which of the following best derbies the immediate response to these disequilibria?
A. At the current exchange rate, there is an excess supply of output. Producers will cut production until aggregate demand equals supply
B. The domestic currency is overvalued at the current level of output. The exchange rate will rise until asset market equilibrium is restored.
C. The domestic currency is undervalued at the current level of output. The exchange rate will fall until asset market equilibrium is restored.
7. Honduras runs a fixed exchange rate with the US. Suppose that the Honduran. Central bank wanted to devalue their currency (the lempira), but leave the Honduran money supply unchanged. Which of the following would accomplish this goal?
A. They purchase lempira with reserves of US dollars, then sell Honduran bonds to the Honduran Public
B. They purchase dollars with lempira, then sell Honduran bonds to the Honduran public
C. They purchase dollars with lempira, then buy Honduran bonds from the Honduran public
8. If speculators believe that a fixed exchange rate is about to be revalued (i.e. increased in value against the anchor currency), then what must the central bank do to keep the exchange rate fixed?
A. Ensure that home interest rates remain equal to foreign interest rates
B. Drop home interest rates below foreign interest rates
C. Raise home interest rates above foreign interest rates above foreign interest rates to fend off the speculative attack
Explanation / Answer
Question 1
Transition between the short-run and the long-run in economics depends on the pace of change in prices of goods as well as wages in the economy.
If wages and price of goods take considerable time with respect to change or if they are sticky then the transition between the short-run and the long-run also takes time.
However, if wages and prices of goods change in quick manner or if they are quite flexible then transition also happens in short-rime period.
So, it can be stated that the speed at which we transition between the short-run and the long-run in economics is determined by the flexibility of goods prices and wages.
Hence, the correct answer is the option (C).
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