Explain how an increase in government spending would affect the DD-AA schedule in the short run
What will be an ideal response?
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.
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Use the following graph to answer the next question.
What combination would most likely cause a shift from AD1 to AD2?
A. An increase in taxes and an increase in government purchases B. An increase in taxes and no change in government purchases C. A decrease in taxes and an increase in government purchases D. A decrease in taxes and a decrease in government purchases
A President who favors the use of government spending and taxes as tools to offset instability in the economy is likely to have advisers who are oriented toward
A) Keynesian economics. B) Monetarist economics. C) rational expectations. D) the policies advocated by Milton Friedman.
If an estimated regression explains none of the variation, R2 will be
A) 0. B) between 0 and 1. C) 1. D) unable to determine with the information given.
The actions taken by arbitrageurs in the foreign exchange markets
a. destabilize foreign exchange markets b. are highly risky c. have no effect on exchange rates d. help assure that exchange rates are equalized across all markets e. are the same as those undertaken by speculators