Question 44 Under a fixed exchange rate, suppose that the economy initially stays at the long-run equilibrium of full- employment output level. After permanent fiscal expansion, when the economy adjusts from its short-run equilibrium to the new long-run equilibrium, DD remains unchanged; AA shifts back to its position in the initial long-run equilibrium. DD shifts to the left; AA shifts up. Both DD and AA shift back to their positions in the initial long-run equilibrium; DD shifts back to its position in the initial long-run equilibrium; AA remains unchanged. DD remains unchanged; AA shifts down.
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- 6. In a small open economy undertaking a fiscal contraction, the real interest rate should: rise fall stay the same move by the same amount as the exchange rateD4) FinanceImagine that the economy is at a point that is below both AA and DD, where both the output and asset markets are out of equilibrium. Which first action is TRUE? The exchange rate will first increase to a point on the AA schedule. The exchange rate will first move to a point on the DD schedule. The output will directly decrease. The output will directly increase. The economy will stay at this level in the short run.Consider the bilateral exchange rate between Australia and New Zealand. Suppose $1 AUD buys $1.05 NZD, the Australian price level is $100 AUD and the New Zealand price level is $110 NZD. Which of the following is TRUE? a.The Australian dollar has more real purchasing power than the New Zealand dollar b.In the long run, the New Zealand dollar is likely to depreciate against the Australian dollar c.The real exchange rate is 0.90 d.The real exchange rate is 1.10
- 4. In your macroeconomic lectures you are often told that exchange rates and interest rates are important for macroeconomic decision-making. How does an increase in Japan’s government budget deficit affect each of the following? i. The real interest rate in the short run in Japan. Explain. ii. Private domestic investment in plant and equipment in Japan.Question 1It is often said by economists that fixed exchange rates make monetary policy totally ineffective as a stabilization tool. Explain why you agree or disagree with this statement. Assume an open economy. Keynes favoured fiscal policy over monetary policy to stabilize the economy and fixed exchange rates over flexible exchange rates. Is it consistent or inconsistent to pair fiscal policy with fixed exchange rates and monetary policy with flexible exchange rates? Explain why.QUESTION 4: PLACE TRUE OR FALSE OR UNCERTAIN (T/F/U) According to the classical macroeconomic model, expansionary fiscal policy has an inflationary effect. Assuming that you have free capital mobility and fixed exchange rate policy, then fiscal policy has a positive effect on output Expansionary fiscal policy always has a depreciating effect on the domestic exchange rate. According to the relative income hypothesis, the savings rate is a non-linear function of the ratio of current to previous peak income. In the IS-LM-BOP model, macroeconomic adjustments occur through changes in money supply if the country adopts a fixed exchange rate regime. According to the impossible trinity, a country that has a liberalized capital account and independent monetary policy will also achieve a stable exchange rate.
- QUESTION 10Suppose there are two countries that are identical in every way with the following exception. Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible exchange rate regime. Suppose government spending in both countries rises by the same amount. Given this information, we know that: the change in output in A will be greater than in B. the change in output in B will be greater than in A. the change in output will be the same in both countries. the relative output effects are ambiguous.urgent Consider an OPEN ECONOMY with a floating exchange rate regime. In the aftermath of recent elections won by the country’s socialist party, consumer confidence and consumption has increased dramatically. Within the IS-MP framework for an open economy, explain and illustrate graphically what the effect is of the increase in overall consumption on equilibrium output, the real interest rate, net cash outflow, the trade balance and the country’s real exchange rate.Which of the following best explains why a fiscal expansion tends to decrease net exports? OA. An expansionary fiscal policy leads to an increase in output, an increase in the interest rate and an appreciation of the domestic currency. The appreciation causes imports to increase whereas a higher level of output increases exports. Therefore, net exports decrease. OB. Net exports, NX NX(Y, Y, E), depend negatively on domestic output, Y, and positively on the exchange rate, E. An expansionary fiscal policy leads to an increase in output but has no impact on the exchange rate. Therefore, net exports decrease. O C. An expansionary fiscal policy leads to an increase in output, an increase in the interest rate and a depreciation of the domestic currency. Both a depreciation of the domestic currency and a higher level of output combine to decrease exports and increase imports. Therefore, net exports decrease. O D. Net exports, NX NX(Y, Y, E), depend positively on domestic output, Y, and…
- 10 Read the following paragraph and answer the question that follows. A number of factors have contributed to the performance of the South African economy. Firstly, the sizeable monetary injection into the local economy as a stimulus due to COVID economic pressures has given a boost to household disposable incomes over the course of 2021. The depreciation of the exchange rate in 2021 year also provided a boost to the domestic economy. Based on the information in the paragraph above, where is the South African economy in the economic cycle as per the figure above? a. contraction b. trough c. expansion d. peakQ3-19 The IS/LM/BP analysis suggests that, if the BP curve is flatter than the LM curve and the exchange rate is flexible, expansionary fiscal policy will lead to _______ of the country's currency.This will make the fiscal policy _______ effective in influencing national income than if the country had a fixed exchange rate. Select one: a. a depreciation / more b. a depreciation / less c. an appreciation / more d. an appreciation / less4. In your macroeconomic lectures you are often told that exchange rates and interest rates are important for macroeconomic decision-making. a. How does an increase in Japan’s government budget deficit affect each of the following? i. The real interest rate in the short run in Japan. Explain. ii. Private domestic investment in plant and equipment in Japan. b. Draw a correctly labeled graph of the foreign exchange market for the euro, and show the effect of the change in the real interest rate in Japan from part (a)(i) on each of the following. i. Supply of euros. Explain. ii. Yen price of the euro.c. To reverse the change in the yen price of the euro identified in part (b) (ii), should the European Central Bank buy or sell euros in the foreign exchange market? Explain.