1. A temporary fiscal expansion (with full employment) will A. increase the Curr

Question

1. A temporary fiscal expansion (with full employment) will

A. increase the Current Account.

B. increase GDP.

C. depreciate the home exchange rate.

D. cause the XX line to rise.

2. which of the following can make short-term macroeconomic stabilization difficult?

A. it can be difficult to isolate the type of shock hitting an economy.

B. consumers rarely respond to stimulus policy.

C. macroeconomists have no model which makes predictions regarding appropriate policies.

D. recessions are a natural phenomenon that cannot be combated.

3. Now let the government use temporary monetary contraction to restore full employment. In this case the policy re-establishes full employment

A. and restores the currency to its initial value.

B. and restores the currency to an unknown value.

C. but causes the currency to further depreciate.

D. but has an indeterminate effect on the exchange rate.

Suppose a temporary fall occurs in money demand. Using the line, illustrate the impact of this event. Properly label your line.

4. The slop "m" of aggregate demand: Y = D(EP*/P,Y-T,I,G) is

A. negative(m<0)

B. positive and less than on(0<m<1)

C. equal to one(m=1)

D. greater than one(m>1)

The vertical intercept of aggregate demand is

A. Positive

B. equal to zero

C. negative

5. After a depreciation, which do you NOT expect to see

A. import prices that fall.

B. short term fall in the CA.

C. long term increase in the CA.

D. import prices increase less than the exchange rate.

6. Which of the following components is NOT included in the equation for aggregate demand?

A. Y(domestic output)

B. E(the nominal exchange rate)

C. Yf(foreign output)

B. T(taxes)

Explanation / Answer

(1) (B)

A temporary fiscal expansion increases aggregate demand, so AAD curve shifts rightward leading to increase in real GDP.

(2) (A)

If the interaction of economic events cannot be isolated, policy measure will be ineffective.

(3) (A)

With a temporary rise in AD, a contractionary monetary policy will restore previous equilibrium.

(4) (A)

Slope of AD curve is negative, that is why AD is downward sloping.

NOTE: Vertical intercept of AD curve is POSITIVE.

(5) (A)

A currency depreciation makes imports more expensive, so import prices rise.

(6) (C)

Foreign output is not included in equation for aggregate demand.

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