Question 1

When a country is in equilibrium on its long-run aggregate supply curve, the actual price level facing economic agents

Accepted Answer

When a country is in equilibrium on its long-run aggregate supply curve, the actual price level facing economic agents is equal to the price level expected by economic agents, as there are no unexpected changes or imbalances in the economy that would cause prices to deviate from expectations.

Question 2

Many positive investment opportunities with higher expected rates of return have recently been opening up in Central, Eastern, and Western Europe. Explain the effects that such opportunities might have on U.S. financial markets and economic activity, using the AD/AS framework. Will this have inflationary or deflationary effects on the United States? Why? What problems might occur if the U.S. government attempts to offset the short-run price effects of this external phenomenon?

Accepted Answer

The positive investment opportunities in Central, Eastern, and Western Europe could have several effects on U.S. financial markets and economic activity. Using the AD/AS framework, we can analyze these potential effects.

First, the influx of investment opportunities in Europe could lead to increased capital flows out of the United States as investors seek higher returns in the European markets. This could lead to a decrease in investment in the U.S., causing a shift in the aggregate demand (AD) curve to the left, leading to lower economic activity and potentially higher unemployment in the U.S.

Additionally, the increased investment in Europe could lead to higher productivity and economic growth in those regions, leading to an increase in their exports. This could lead to a decrease in U.S. exports, causing a decrease in net exports and a further shift in the AD curve to the left.

In terms of the aggregate supply (AS) curve, the increased investment in Europe could lead to higher productivity and lower production costs in those regions. This could lead to a shift in the AS curve to the right, leading to lower prices for goods and services in the U.S. This could potentially lead to deflationary effects in the United States as prices decrease.

If the U.S. government attempts to offset the short-run price effects of this external phenomenon, they may face several problems. For example, if the government tries to counteract the decrease in investment and economic activity by increasing government spending or cutting taxes, it could lead to higher budget deficits and potentially higher inflation in the long run. Additionally, if the government tries to counteract the deflationary effects by increasing the money supply, it could lead to inflation and potentially destabilize the economy.

In conclusion, the positive investment opportunities in Europe could have significant effects on U.S. financial markets and economic activity. These effects could potentially lead to lower economic activity and higher unemployment in the U.S., as well as deflationary effects. The U.S. government would need to carefully consider the potential consequences and trade-offs of any policy actions taken to offset these effects.

Question 3

In the aggregate demand/aggregate supply framework

Accepted Answer

In the aggregate demand/aggregate supply framework, both expansionary fiscal and monetary policy can have short-term impacts on income and employment, but neither has a permanent impact on the natural level of income and employment. This is because the natural level of income and employment is determined by factors such as technology, resources, and institutions, which are not affected by policy. The short-term impact of policy on income and employment is due to changes in aggregate demand and/or supply, but these effects eventually dissipate as prices and wages adjust to the new equilibrium.

Question 4

Other things equal, a rise in foreign interest rates leads to __________ in the home Country's equilibrium level of income and to __________ in the home country's price Level in the short run.

Accepted Answer

A rise in foreign interest rates can lead to capital outflows from the home country as investors seek higher returns abroad. This can result in a depreciation of the home country's currency, making exports cheaper and imports more expensive. The increased demand for exports and reduced demand for imports can lead to a rise in the home country's equilibrium level of income. Additionally, the depreciation of the currency can lead to higher import prices, contributing to a rise in the overall price level in the short run.

Question 5

In a situation of stagflation, the use of aggregate demand-oriented macro policy to address the problem of the rising price level would, at least in the short run, __________ the price level and __________ the level of output in the economy.

Accepted Answer

In stagflation, both inflation and unemployment are high. Using aggregate demand-oriented policies like reducing government spending or increasing taxes would decrease demand, thus decreasing both the price level and output.

Question 6

Suppose that there is an exogenous increase in foreign prices. Using the AD/AS framework, explain how this would affect the domestic economy under fixed exchange rates and under flexible exchange rates. Would your answer be different if there were no imported inputs into the production process? Why or why not?

Accepted Answer

The answer of Suppose that there is an exogenous increase...

Question 7

It has been argued that one advantage of fixed exchange rates is that they promote price discipline or price stability between trading partners. Is this argument supported by the AD/AS framework? Why or why not?

Accepted Answer

The answer of It has been argued that one advantage...

Question 8

What effect does opening the economy have on the aggregate demand curve? The aggregate supply curve? Is it possible that the long-run supply curve will shift to the right more rapidly in the open economy than in the closed economy? Why or why not?

Accepted Answer

The answer of What effect does opening the economy have...

Question 9

An increase in the long-run equilibrium level of income can result from

Accepted Answer

Each of the options mentioned in the answer (improved technology, adoption of improved management techniques, and a larger capital stock) can lead to an increase in productivity and potential output of an economy, resulting in an increase in the long-run equilibrium level of income. Therefore, all of the options (Option D) can result in an increase in the long-run equilibrium level of income.

Question 10

Suppose that, in a world of flexible wages and prices, there is a sudden autonomous increase in the flow of short-term financial capital into country A. Will the impact on country A's aggregate demand (AD) curve and hence on output in the short run be different in if A has a flexible exchange rate rather than a fixed exchange rate? Explain.

Accepted Answer

The answer of Suppose that, in a world of flexible...

Question 11

Suppose that a partner country autonomously increases its demand for the home country's exports. With a fixed exchange system, this increase in export demand __________; with a flexible exchange rate system, this increase in export demand __________.

Accepted Answer

With a fixed exchange rate system, an increase in export demand from a partner country will result in an increase in demand for the home country's currency. This will lead to an increase in the supply of the partner country's currency and cause its value to depreciate, effectively lowering the cost of the home country's exports to the partner country. As a result, the home country's exports will increase, which will shift its AD curve to the right. However, with a flexible exchange rate system, the home country's currency will appreciate in response to the increase in export demand from the partner country, reducing the competitiveness of the home country's exports. Therefore, there will be no shift in the home country's AD curve.

Question 12

If the AD curve intersects the short-run aggregate supply curve to the left of the long-run aggregate supply curve, under flexible exchange rates, then the long-run equilibrium position

Accepted Answer

If the AD curve intersects the short-run aggregate supply curve to the left of the long-run aggregate supply curve, then the economy is in a recessionary gap. In the long-run, wages will adjust downwards due to prices being lower than expected, which will shift the short-run aggregate supply curve to the right, ultimately reaching the long-run equilibrium position. This adjustment process is facilitated by flexible exchange rates. Therefore, choice A is the correct answer.

Question 13

Other things equal, with imported intermediate goods, an increase in foreign prices will lead to a __________ shift in a home country's short-run aggregate supply curve and__________ shift in the home country's aggregate demand curve.

Accepted Answer

The answer of Other things equal, with imported intermediate goods,...

Question 14

In considering the slope of the open-economy aggregate demand curve (AD), a valid general statement is that, other things equal, the open-economy AD __________.

Accepted Answer

The answer of In considering the slope of the open-economy...

Question 15

If a country's currency depreciates in the foreign exchange markets, the result will be a shift of the aggregate demand curve __________; in addition, if intermediate goods are an important component of the country's imports, the short-run aggregate supply curve __________.

Accepted Answer

When a country's currency depreciates, its exports become cheaper and imports more expensive, leading to an increase in aggregate demand (shift to the right). If intermediate goods are a significant part of imports, their higher cost will increase production costs, shifting the short-run aggregate supply curve to the left.

Question 16

Expansionary aggregate demand-oriented fiscal policy leads, ceteris paribus, to

Accepted Answer

Expansionary aggregate demand-oriented fiscal policy, such as increased government spending or tax cuts, typically does not change the long-run equilibrium level of income due to the economy's return to its potential output, but it does lead to an increase in the price level in the short run due to higher demand.

Question 17

In the AD/AS framework, when the economy is in long-run equilibrium,

Accepted Answer

Long-run equilibrium refers to the point at which actual prices are equal to expected prices. In this state, there is neither inflation nor recession occurring. The entire labor force being employed or actual levels of income and employment being less than natural levels is not necessarily a characteristic of long-run equilibrium.

Question 18

Stagflation can result

Accepted Answer

Stagflation occurs when an economy experiences stagnant growth (or recession) and high inflation simultaneously. An increase in the price of foreign-produced inputs can lead to higher production costs domestically, which can contribute to inflation. At the same time, if these higher costs reduce overall spending and investment due to increased prices, economic growth can stagnate, leading to stagflation.

Question 19

Suppose that the government attempts to stimulate income and employment by using monetary policy. Explain how this will affect the economy in the short run and the long run. What must occur for this policy action to have a permanent impact on income and employment? How might this occur?

Accepted Answer

The answer of Suppose that the government attempts to stimulate...

Question 20

If actual prices in a country are less than the expected prices in the country, then the country's

Accepted Answer

If actual prices in a country are less than the expected prices in the country, then the short-run aggregate supply curve will shift to the right. This is because firms will be willing to produce more at the lower price levels, increasing the quantity supplied at each price level, causing the short-run aggregate supply curve to shift to the right.

Quiz 27: Prices and Output in the Open Economy: Aggregate Supply and Demand

When a country is in equilibrium on its long-run aggregate supply curve, the actual price level facing economic agents

In the aggregate demand/aggregate supply framework

Other things equal, a rise in foreign interest rates leads to in the home Country's equilibrium level of income and to in the home country's price Level in the short run.

In a situation of stagflation, the use of aggregate demand-oriented macro policy to address the problem of the rising price level would, at least in the short run, the price level and the level of output in the economy.

It has been argued that one advantage of fixed exchange rates is that they promote price discipline or price stability between trading partners. Is this argument supported by the AD/AS framework? Why or why not?

What effect does opening the economy have on the aggregate demand curve? The aggregate supply curve? Is it possible that the long-run supply curve will shift to the right more rapidly in the open economy than in the closed economy? Why or why not?

An increase in the long-run equilibrium level of income can result from

Suppose that a partner country autonomously increases its demand for the home country's exports. With a fixed exchange system, this increase in export demand ; with a flexible exchange rate system, this increase in export demand .

If the AD curve intersects the short-run aggregate supply curve to the left of the long-run aggregate supply curve, under flexible exchange rates, then the long-run equilibrium position

Other things equal, with imported intermediate goods, an increase in foreign prices will lead to a shift in a home country's short-run aggregate supply curve and shift in the home country's aggregate demand curve.

In considering the slope of the open-economy aggregate demand curve (AD) , a valid general statement is that, other things equal, the open-economy AD __________.

If a country's currency depreciates in the foreign exchange markets, the result will be a shift of the aggregate demand curve ; in addition, if intermediate goods are an important component of the country's imports, the short-run aggregate supply curve .

Expansionary aggregate demand-oriented fiscal policy leads, ceteris paribus, to

In the AD/AS framework, when the economy is in long-run equilibrium,

Stagflation can result

Suppose that the government attempts to stimulate income and employment by using monetary policy. Explain how this will affect the economy in the short run and the long run. What must occur for this policy action to have a permanent impact on income and employment? How might this occur?

If actual prices in a country are less than the expected prices in the country, then the country's