1. The speed at which we transition between the short run and the long run in ec
ID: 1103644 • 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
Explanation / Answer
Question number 1. The correct answer is option C. Wage price flexibility is the most important consideration for short and long run distinction. Models where short and long run distinction does not matter are mostly equipped with wage price flexibility while models where this matters are generally considered to have rigidity in Wages and prices
Question number 2. The correct answer is option C. Note that the current exchange rate is 13 pesos per dollar while the exchange rates determined by the price levels is 12 pesos per dollar. This means dollar win depreciate and mexicans will be able to buy more American imports.
Question number 3. The correct answer is option C. When the money supply is decreased in America it would increase the interest rate on dollar deposits enhance will increase the capital inflow in America. Higher demand for Dollar will increase its value and so the dollar will appreciate.
Question number 4. Correct option is option A. Note that the sum of the two elasticities is 1. Hence an exchange rate depreciation will have no effect on the current account deficit.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.