6) In the short -run, we assume that the money prices of goods and services are
A) temporarily fixed.
B) permanently fixed.
C) allowed to fluctuate.
D) equal to long -run prices. E) None of the above.
Answer: A
Question Status: Previous Edition
7) What would be the best description of what we assume about money prices in the Short run?
A) Money prices of goods and services vary.
B) Money prices of goods and services not related to each other.
C) Money prices of goods are only temporarily fixed.
D) Money prices of services are only temporarily fixed.
E) C and D.
Answer: E
Question Status: Previous Edition
16.4 Output Market Equilibrium in the Short Run: The DD Schedule
1) In the short -run, a temporary increase in money supply
A) shifts the DD curve to the right, increases output and appreciates the currency.
B) shifts the AA curve to the left, increases output and depreciates the currency.
C) shifts the AA curve to the left, decreases output and depreciates the currency.
D) shifts the AA curve to the left, increases output and appreciates the currency.
E) shifts the AA curve to the right, increases output and depreciates the currency.
Answer: E
Question Status: Previous Edition
2) The DD schedule shows all combinations of which 2 variables so that the output market is in equilibrium?
A) imports and exports
B) exports and the exchange rate
C) foreign prices and the exchange rate
D) output and the exchange rate
E) output and exports
Answer: D
Question Status: Previous Edition
3) Which of the following does not affect the position of the DD curve? A) monetary policy
B) government spending
C) taxes
D) export Demand
E) price levels
Answer: A
Question Status: Previous Edition
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4) Temporary tax cuts would cause:
A) the AA -curve to shift left. B) the AA -curve to shift right. C) the DD -curve to shift left. D) the DD -curve to shift right. E) a shift in the AA -curve, although the direction is ambiguous. Answer: D
Question Status: Previous Edition
5) How would you define a DD schedule?
A) the combinations of output and the exchange rate that must hold when the home money market and
the foreign exchange market are in equilibrium
B) the combinations of output and the exchange rate that must hold when the output market is in
short-run equilibrium
C) factors of production in the long run
D) Both A and B.
E) None of the above.
Answer: B
Question Status: Previous Edition
6) Which of the following is the most accurate?
A) Any disturbance that lower aggregate demand for domestic output shifts the DD schedule to the right.
B) Any disturbance that lowers aggregate demand for foreign output shifts the DD schedule to the left.
C) Any disturbance that raises aggregate demand for domestic output shifts the DD schedule to the right.
D) Any disturbance that raises aggregate demand for domestic output shifts the DD schedule to the left.
E) None of the above.
Answer: C
Question Status: New
7) Discuss the main factors affecting the position of the DD schedule.
Answer: The level of government demand, taxes, and investment; the domestic and foreign price levels;
variations in domestic consumption behavior; and the foreign demand for home output.
Question Status: Previous Edition
8) Give 4 examples of situations that would cause the DD -curve to shift to the left. Answer: Correct answers include any situations that involve:
(1) an decrease in government spending (eg. Decrease in military spending) (2) an increase in taxes
(3) a fall in Investment demand
(4) a price increase, which would lower net export demand (assuming E and P? stay constant) (5) a fall in foreign prices (assuming E and P stay constant)
(6) an autonomous fall in consumption demand (as long as it is not entirely a change in import demand)
(7) a shift to demanding more foreign goods at the expense of domestic good demand
Question Status: Previous Edition
9) Explain what are the factors that shift the DD Schedule.
Answer: A change in government demand, change in Taxes, a change in investment, change in domestic prices,
change in foreign prices, changes in the consumption function and a demand shift between foreign and domestic goods.
Question Status: Previous Edition
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16.5 Asset Market Equilibrium in the Short Run: The AA Schedule
1) How is the AA schedule derived?
A) The AA schedule has a positive slope because an increase in output leads to a depreciation of the
currency.
B) The AA schedule has a negative slope because an increase in output leads to a decrease in the domestic
interest rate.
C) The AA schedule has a negative slope because an increase in output leads to an increase in the
domestic interest rate and a domestic currency appreciation.
D) The AA schedule has a positive slope because an increase in the money supply leads to an increase in
the domestic interest rate. E) None of the above.
Answer: C
Question Status: Previous Edition
2) Which one of the following statements is most accurate?
A) In the long run, foreign output depends only on the available domestic supplies of factors of
production.
B) In the short run, domestic output depends only on the available domestic supplies of factors of
production.
C) In the long run, domestic output depends only on the available domestic supplies of factors of
production.
D) In the long run and in the short run, domestic output depends only on the available domestic supplies
of factors of production. E) None of the above.
Answer: C
Question Status: Previous Edition
3) In the short -run, a temporary increase in the money supply
A) shifts the AA curve to the right, increases output and depreciates the currency.
B) shifts the AA curve to the left, increases output and depreciates the currency.
C) shifts the AA curve to the left, decreases output and depreciates the currency.
D) shifts the AA curve to the left, increases output and appreciates the currency.
E) shifts the AA curve to the right, increases output and appreciates the currency.
Answer: A
Question Status: Previous Edition
4) Equilibrium output is determined from the following equation(s):
A) Y =C(Yd)+I+G+CA(EP*/P,Yd). B) Y =C(Y-T)+I+G+CA(EP*/P,Y-T). C) Y =D(EP*/P,Y-T,I,G). D) A and C.
E) A, B, and C.
Answer: E
Question Status: New
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5) The interest parity condition requires that:
A) all countries have the same interest rate.
B) there is a unique exchange rate for every output level.
C) purchasing power parity hold.
D) interest rates are fixed in the short run.
E) the money supply is held constant.
Answer: B
Question Status: Previous Edition
6) How is the AA schedule derived?
A) It is derived by the schedule of interest rate and output combinations that are consistent with
equilibrium in the domestic money market and the foreign exchange market.
B) It is derived by the schedule of exchange rate and output combinations that are consistent with
equilibrium in the foreign money market and the domestic exchange market.
C) It is derived by the schedule of exchange rate and output combinations that are consistent with
equilibrium in the domestic money market and the foreign exchange market.
D) It is derived by the schedule of exchange rate and output combinations that are consistent with
equilibrium in the domestic bond market and the foreign asset market. E) None of the above.
Answer: C
Question Status: Previous Edition
7) Explain how the AA schedule is derived.
Answer: For a fixed real money supply, an increase in output leads to an increase in the domestic interest rate.
In the foreign exchange market, an increase in the domestic interest rate leads to a lower nominal exchange rate, thus appreciating the currency. Therefore, the relationship between nominal exchange rate and output is negative; this leads to a negative slope of the AA schedule, which has the nominal exchange rate and output on its axes.
Question Status: Previous Edition
8) Discuss the main factors affecting the position of the AA schedule.
Answer: Changes in the domestic money supply; changes in the domestic price level; changes in the expected
future exchange rate; changes in the foreign interest rate; and shifts in the aggregate real money demand schedule.
Question Status: Previous Edition
9) What is the AA -curve? Why does it have a negative slope? What factors cause it to shift? P.219 Answer: The AA -curve is the specific levels of E and Y under which the money and foreign exchange markets
are in equilibrium.
The AA-curve has a negative slope because an increase in Y will cause E to fall (a domestic currency appreciation).
The factors that affect it are: the money supply, price level, expected exchange rate, foreign interest rates, and the level of real money demand.
Question Status: Previous Edition
10) Explain what are the factors that shift the AA Schedule?
Answer: Changes in the domestic money supply; changes in the domestic price level; changes in the expected
future exchange rates; changes in the foreign interest rate and shifts in the aggregate real money demand.
Question Status: Previous Edition
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16.6 Short -Run Equilibrium for an Open Economy: Putting the DD and AA Schedules Together
1) Imagine that the economy is at a point on the DD -AA schedule that is above both AA and DD, where both
the output and asset markets are out of equilibrium. Which first action is true? A) The economy will stay at this level in the short run.
B) The exchange rate will first drop to a point on the AA schedule.
C) The exchange rate will first move to a point on the DD schedule.
D) The AA -DD equilibrium will shift to the position of the economy. E) None of the above.
Answer: B
Question Status: Previous Edition
2) Which of the following have to be in equilibrium for the economy to be in equilibrium?
A) the money market only
B) the goods market only
C) the output and assets markets
D) the savings and investment markets
E) the goods and output markets
Answer: C
Question Status: Previous Edition
3) Assume the asset market is always in equilibrium. Therefore a fall in Y would result in:
A) higher inflation abroad.
B) a decreased demand for domestic products.
C) a contraction of the money supply.
D) a depreciation of the home currency.
E) an appreciation of the home currency.
Answer: D
Question Status: Previous Edition
4) Why does an exchange rate -output combination lying above both DD and AA jump first to AA in equilibrium?
A) Asset prices can adjust immediately.
B) Production plans can adjust immediately.
C) to preserve full employment
D) Prices are nominal and demand is real.
E) None of the above.
Answer: A
Question Status: New
5) Explain how would an increase in government spending affect the DD -AA schedule in the short run.
Answer: An increase in government spending will increase aggregate demand, which will shift the DD to the
right. If AA remains unchanged, the new equilibrium will be at a higher Y and lower E. Since E is the nominal exchange rate, a lower E is an appreciation of the currency.
Question Status: Previous Edition
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