Describe weaknesses of the IS-LM-FE model.
What will be an ideal response?
POSSIBLE RESPONSE: The IS-LM-FE model is essentially a short-run model, and for this reason it assumes prices are fixed. It does not itself have any inflation dynamics. It also does not have any built-in role for expectations; and it does not distinguish between stock and flow concepts involving international capital flows and interest rates. Furthermore, it seems to indicate that a country can run indefinite current account deficits without any specific limits on borrowing from foreign countries.
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Consider a short-run equilibrium in a perfectly competitive market. Suppose that the firms' average total cost and marginal cost schedules differ. In the short run,
A) all firms in the market must be able to make an economic profit. B) all firms produce equal amounts of output. C) some firms might incur an economic loss, but still produce output. D) some firms might make an economic profit and, as a result, shut down. E) all firms in the market must be able to make either positive or zero economic profit.
A free trade agreement plus a common set of tariffs toward non-members is called
A) a common market. B) a customs union. C) a free trade area. D) an economic union. E) a partial trade agreement.
Floating exchange rates
A) systematically lead to much larger but less frequent short-run deviations from the absolute PPP. B) systematically lead to much larger and more frequent short-run deviations from the relative PPP. C) systematically lead to much smaller and less frequent short-run deviations from the relative PPP. D) systematically lead to much smaller but more frequent short-run deviations from the relative PPP. E) systematically lead to much smaller and less frequent short-run deviations from the absolute PPP.
If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply
A) increases by only the initial increase in reserves. B) increases by only one-half the initial increase in reserves. C) increases by a multiple of the initial increase in reserves. D) does not change.