To answer the following question, please refer to the figure below. Concentrating only at the lower left quadrant, discuss the relationship between the U.S. real money supply and the dollar/euro exchange rate, E$/E
What will be an ideal response?
The lower left quadrant in the figure described the Purchasing Power Parity (PPP) relationship. The relationship between the U.S. real money supply and the dollar/euro exchange rate, E$/E is negative.
is equal to the price level ratio, PUS/ .
In this derivation of the relationship, the following variables are assumed constants: , , and .
So, = /PUS
PUS ↑ → ↑
→
Thus, the purchasing power of dollar decreases due to the increase in the price level.
→
i.e., dollar depreciates due to PPP
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a. True b. False Indicate whether the statement is true or false
Which of the following solutions would a Keynesian economist suggest to avoid turning the recession of the late 20s into the depression of the 30s?
A. balance the federal budget B. decrease the available of unemployment compensation C. decrease the interest rate D. decrease government spending
Many environmentalists have advocated a substantial increase in the gasoline tax to cut down the federal deficit and to reduce pollution due to auto emissions. Such a tax increase would be devastating to people who commute significant distances to work. In fact, it would provide an incentive to relocate closer to work or change jobs. Economists refer to such effects of taxes as the
A. burden of a tax. B. regressive incidence of a tax. C. incidence of a tax. D. excess burden of a tax.
In the short run average costs eventually increase because of ________, and in the long run average costs eventually increase because of ________.
A. diminishing returns; diseconomies of scale B. diseconomies of scale; diminishing returns C. increasing returns to scale; diseconomies of scale D. constant returns to scale; decreasing returns to scale