In an open economy, monetary policy, in the short run, has: O a smaller impact o

Question

In an open economy, monetary policy, in the short run, has: O a smaller impact on aggregate demand as compared to a closed economy. O the same impact on aggregate demand as compared to a closed economy O a larger impact on aggregate demand as compared to a closed economy demand. QUESTION 5 Assume that a Big Mac burger costs $3.57 in Australia and 7.80 zlotys in Poland.If the exchange rate is 1.8 zlotys per dolar, purchasing power parity predicts that the dollar will: O appreciate as the demand for dollars rises in the long run. O appreciate as the supply for dollars falls in the long run. O depreciate as the demand for dollars falls in the long run. Odepreciate as the supply for dollars rises in the long run.

Explanation / Answer

As Domestic Currency gets depreciated we see Larger impact on aggregate demand as compared to closed economy Hence Correct option is 3 in this context.

Answer for Question 5

Big Mac PPP is higher than Exchange rate 2.17>1,78

Hence Dollar is undervalued which should appreciate as demand for dollar rises in Long run.

Option A is correct.

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