Question 1

When the exchange rate appreciates, the aggregate demand curve shifts to the left causing a decrease in the price level.

Accepted Answer

An appreciation of the exchange rate makes exports more expensive and imports cheaper, reducing net exports, which is a component of aggregate demand, thus shifting the aggregate demand curve to the left and potentially lowering the price level.

Question 2

An appreciation of the currency would tend to stimulate the production of tradable goods.

Accepted Answer

An appreciation of the currency makes exports more expensive and imports cheaper, which tends to reduce the competitiveness of domestic industries producing tradable goods, potentially decreasing their production.

Question 3

When the exchange rate depreciates, the aggregate demand curve shifts to the right causing an increase in real GDP.

Accepted Answer

When the exchange rate depreciates, domestic goods become cheaper relative to foreign goods, leading to an increase in exports and a decrease in imports. This boosts aggregate demand, shifting the aggregate demand curve to the right, which can cause an increase in real GDP as domestic production rises to meet the higher demand.

Question 4

When the exchange rate depreciates, the aggregate demand curve shifts to the right causing a decrease in the price level.

Accepted Answer

When the exchange rate depreciates, the aggregate demand curve may shift to the right due to increased exports and decreased imports, but this typically leads to an increase in the price level, not a decrease, because of higher demand for goods and services.

Question 5

When the exchange rate depreciates, the current account moves into deficit causing the aggregate demand curve to shift to the left.

Accepted Answer

When the exchange rate depreciates, it generally makes a country's exports cheaper and imports more expensive, which can lead to an improvement in the current account balance, not a deficit. This can increase aggregate demand (as exports rise and imports fall), potentially shifting the aggregate demand curve to the right, not the left.

Question 6

The value of the Mexican peso and the performance of the Mexican economy are usually unrelated.

Accepted Answer

The value of the Mexican peso is often closely related to the performance of the Mexican economy, as economic indicators such as GDP growth, inflation, and trade balances can influence investor confidence and currency value.

Question 7

An exchange rate shock shifts the AS curve to the right.

Accepted Answer

An exchange rate shock typically affects the AD (Aggregate Demand) curve, not the AS (Aggregate Supply) curve. A depreciation of the domestic currency can shift the AD curve to the right due to increased demand for exports and reduced demand for imports, while an appreciation could shift it to the left. The AS curve represents the total supply of goods and services in the economy and is influenced by factors like labor, technology, and natural resources.

Question 8

An exchange rate shock would tend to cause both an increase in the price level and a decline in real GDP.

Accepted Answer

An exchange rate shock, such as a sudden depreciation of the domestic currency, can lead to higher import prices, contributing to inflation (increase in the price level) and can also make exports cheaper and imports more expensive, potentially reducing domestic consumption and investment due to higher prices for imported goods and services, which can lead to a decline in real GDP.

Question 9

An exchange rate shock shifts the aggregate demand curve to the left.

Accepted Answer

An exchange rate shock can shift the aggregate demand curve either to the left or to the right, depending on whether the currency appreciates or depreciates. A depreciation makes domestic goods cheaper for foreigners, potentially increasing exports and shifting aggregate demand to the right. Conversely, an appreciation makes domestic goods more expensive for foreigners, potentially decreasing exports and shifting aggregate demand to the left.

Question 10

An exchange rate shock is a large change in the real value of a currency in a very short period of time.

Accepted Answer

An exchange rate shock refers to a sudden and unexpected change in the exchange rate between two currencies, significantly altering their real value relative to each other in a short period.

Question 11

Changes in the exchange rate do not have any appreciable effects on the production of nontradable goods.

Accepted Answer

Changes in the exchange rate can affect the cost of imported inputs for nontradable goods and the purchasing power of consumers, indirectly influencing the production of nontradable goods.

Question 12

Explain why the aggregate demand curve slopes downwards and to the right.

Accepted Answer

The answer of Explain why the aggregate demand curve slopes...

Question 13

Carefully describe how changes in foreign income tend to affect a country's exports.

Accepted Answer

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Question 14

Suppose that GDP rose by ten percent and that imports only rose by one percent. Explain what this would imply about the income elasticity of the demand for imports.

Accepted Answer

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Question 15

Country X has an income elasticity of demand for exports and imports of one and three, respectively. If foreign income and domestic income both rose by the same amount, what would tend to happen to the trade balance?

Accepted Answer

The answer of Country X has an income elasticity of...

Question 16

If CNBC reported today that the U.S. dollar depreciated one percent against the Euro, describe what this would mean for U.S. trade with the EU by referring to the concept of the price elasticity of demand for imports and exports.

Accepted Answer

The answer of If CNBC reported today that the U.S....

Question 17

Demonstrate the effects of an appreciating currency on the price level in a country.

Accepted Answer

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Question 18

Show how the depreciation of currency could lead to a higher price level.

Accepted Answer

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Question 19

An appreciating currency would tend to lower the price level and reduce the level of output. Is this statement true or false? Explain your answer.

Accepted Answer

When a currency appreciates, it means that it has increased in value relative to other currencies. This makes imported goods and services cheaper, which can lower the overall price level in an economy. 
In terms of output, an appreciating currency can make a country's exports more expensive for foreign buyers. This can reduce demand for these exports, leading to a decrease in output. 
However, it's important to note that these effects can be influenced by a variety of other factors, including government policy and the overall state of the global economy. For example, if a country's trading partners also have strong currencies, the impact on exports might be less significant. Similarly, if a country is a large importer of goods and services, the decrease in the price level might stimulate domestic consumption and partially offset the decrease in output. 
So while the statement is generally true, the actual impact of currency appreciation can vary depending on the specific circumstances.

Question 20

What is an exchange rate shock? Show the effects of this type of event on real GDP and the price level in the short run.

Accepted Answer

The answer of What is an exchange rate shock? Show...

Quiz 16: Open Economy Macroeconomics