Question 1

Which one of the following statements is the MOST accurate?

Accepted Answer

A permanent increase in money demand can indeed be offset by a permanent increase in the money supply of equal magnitude, maintaining equilibrium in the money market. This is a fundamental principle in monetary economics, where adjusting the money supply can counteract changes in money demand to stabilize the economy.

Question 2

In the short run, a permanent increase in the domestic money supply causes

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Question 3

A permanent increase in the domestic money supply

Accepted Answer

A permanent increase in the domestic money supply typically leads to inflation, which reduces the value of the domestic currency. This results in a proportional rise in the exchange rate (E), where E represents the price of foreign currency in terms of the domestic currency. Consequently, the expected future exchange rate must also rise proportionally, reflecting the anticipated continued effect of the increased money supply on the currency's value.

Question 4

A permanent fiscal expansion

Accepted Answer

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...

Question 5

In the short run, a permanent increase in the domestic money supply

Accepted Answer

A permanent increase in the domestic money supply has stronger effects on the exchange rate and output than an equal temporary increase. This is because a permanent increase in the money supply leads to a sustained increase in demand for domestic goods and services, resulting in a higher output level in the long run. However, this sustained increase in demand also leads to higher inflation expectations, which puts downward pressure on the domestic currency's value in the foreign exchange market. In contrast, a temporary increase in the money supply has less impact on output as it only leads to a short-lived increase in demand, but it still affects the exchange rate through the inflation expectations channel. Therefore, a permanent increase in the money supply has stronger effects on both output and the exchange rate than an equal temporary increase.

Question 6

Which statement best describes the current account balance in the short run?

Accepted Answer

Monetary expansion increases the money supply and can lead to a decrease in the exchange rate. A decrease in the exchange rate makes exports cheaper and more competitive, while imports become more expensive. Therefore, an increase in exports and decrease in imports will increase the current account balance.

Question 7

Show the effects of a permanent increase in the money supply.

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Question 8

If the economy starts in long-run equilibrium, a permanent fiscal expansion will cause

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Question 9

Demonstrate how a permanent fiscal expansion will not increase output in the long run.

Accepted Answer

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Question 10

Which one of the following statements is the MOST accurate?

Accepted Answer

Over time, a permanent expansion of the money supply is more likely to push the price level to its long-run value and return the economy to full employment, according to the long-run neutrality of money concept. Temporary expansions do not have the same long-term effects on the economy's output and employment levels.

Question 11

Explain and give some examples of governmental policy problems.

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Question 12

What is inflation bias? What measures have governments taken to avoid it?

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Question 13

According to historical data, what is the effect of a sharp change in the current account on the exchange rate (both in the short and long run)?

Accepted Answer

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Question 14

Using the DD model, explain what happens to out put when Government demands increase. Use a figure to explain when it is taking place.

Accepted Answer

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Question 15

In the short run

Accepted Answer

In the short run, monetary expansion (increasing the money supply) leads to lower interest rates and can cause an increase in domestic demand for goods and services. This can lead to an increase in imports, which results in a higher current account (CA) deficit. On the other hand, fiscal expansion (increasing government spending or reducing taxes) can lead to an increase in domestic demand for goods and services, but it can also lead to an increase in domestic production, which may reduce imports and result in a lower CA surplus or even a CA deficit. Therefore, in the short run, monetary expansion causes the CA to increase (due to higher imports) and fiscal expansion causes the CA to decrease (due to higher domestic production reducing imports).

Question 16

Which of the following is TRUE of the current account balance?

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Question 17

In long-run equilibrium after a permanent money-supply increase there follows:

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Question 18

Explain the following figure:

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Question 19

Using the DD-AA framework, show the phenomenon of overshooting. Use a figure to explain when it is taking place.

Accepted Answer

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Question 20

Using the DD-AA framework, which one of the following statements is the MOST accurate?

Accepted Answer

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Quiz 17: Output and the Exchange Rate in the Short Run

Which one of the following statements is the MOST accurate?

In the short run, a permanent increase in the domestic money supply causes

A permanent increase in the domestic money supply

A permanent fiscal expansion

In the short run, a permanent increase in the domestic money supply

Which statement best describes the current account balance in the short run?

Show the effects of a permanent increase in the money supply.

If the economy starts in long-run equilibrium, a permanent fiscal expansion will cause

Demonstrate how a permanent fiscal expansion will not increase output in the long run.

Which one of the following statements is the MOST accurate?

Explain and give some examples of governmental policy problems.

What is inflation bias? What measures have governments taken to avoid it?

According to historical data, what is the effect of a sharp change in the current account on the exchange rate (both in the short and long run) ?

Using the DD model, explain what happens to out put when Government demands increase. Use a figure to explain when it is taking place.

In the short run

Which of the following is TRUE of the current account balance?

In long-run equilibrium after a permanent money-supply increase there follows:

Explain the following figure:

Using the DD-AA framework, show the phenomenon of overshooting. Use a figure to explain when it is taking place.

Using the DD-AA framework, which one of the following statements is the MOST accurate?