In each of the following scenarios, explain why the euro will appreciate or depreciate in a system of floating exchange rates. (A) A recession in Germany cuts German purchases of American goods. (B) American investors are attracted by prospects for profit on the Frankfurt Stock Exchange. (C) Interest rates on government bonds rise in the United States but remain stable in Germany.
What will be an ideal response?
(A) The recession leads to a drop in imports. The supply of euros falls, so the price of euros (the exchange rate) rises. The euro appreciates. (B) American investors increase demand for euros in order to buy German stocks. The euro appreciates. (C) Investors supply euros in order to obtain dollars to buy U.S. bonds. The euro will depreciate.
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If the money supply is increased, which curve shifts in the IS—LM model? What direction does it shift? What is the intuition behind this shift?
What will be an ideal response?
For activities in which the benefits are concentrated and the costs widespread, governments are likely to undertake
a. too little of these activities relative to what would be efficient. b. too much of these activities relative to what would be efficient. c. exactly the amount of these activities that would be efficient. d. none of these activities.
A progressive income tax system can be defined as one in which
A. the government uses taxes paid by the wealthy to fund programs for the poor. B. an individual pays more dollars in taxes when his income rises. C. the marginal tax rate rises over time. D. the average tax rate is higher for individuals with higher incomes.
Which of the following is NOT an automatic stabilizer?
A. A change in the tax rate to fight a recession. B. A decrease in tax collections due to a recession. C. Decreased unemployment benefits as the economy expands. D. Increased public assistance payments during a recession.