1. Assume the Marshall-Lerner condition holds. Which of the following will cause
ID: 1143347 • Letter: 1
Question
1. Assume the Marshall-Lerner condition holds. Which of the following will cause an increase in net exports? A. An increase in government spending B. An increase in investment. C. A reduction in foreign output. D. A reduction in the real exchange rate E. All of the above. 2. Which of the following will always cause an increase in net exports? A. A reduction in domestic output. B. An increase in the real exchange rate. C. An increase in government spending D. An increase in investment. E. All of the above. 3. For an open economy, which of the following expressions represents private saving (S)? A. IT- G+CA. B. IT - G-CA. C. IG- T+CA. D. G-T+CA-I E. None of the above. 4. Suppose policy makers want to increase Y and increase NX. Which of the following policie:s would most likely achieve this? A. An increase in government spending B. A real depreciation. C. A reduction in taxes and an increase in the real exchange rate. D. An increase in the real exchange rate.Explanation / Answer
Solution:
1] D] reduction in the real exchange rate
When domestic currency is depreciated imports become more expensive and exports become cheaper because of changes in relative prices.
2] A] reduction in domestic output
Net export of the country could be increases when there is decrease in the domestic output and the goods generated would be more.
3] E] None of the above
For an open economy:
Private saving represents as: I + G - T + NX
4] B] A Real Depreciation
5] B] Interest parity curve shift to the left and becomes steeper
Interest parity curve generally shifts to right when foreign interest rates increase.
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