First, briefly explain why the AD curve is downward sloping in a closed economy. Second, briefly explain why the AD curve is downward sloping in an open economy under fixed exchange rates. And finally, briefly compare the size of the slopes of the two AD curves
What will be an ideal response?
In a closed economy, P affects Y via its effects on M/P, i, and I. In fixed exchange rate regime, changes in P will affect M/P; however, the domestic interest rate cannot change. So, P now affects Y via its effects on the real exchange rate. A drop in P causes a real depreciation, an increase in NX, and an increase in Y. Because the change in P has a second effect in the open economy version, that would tend to make the AD curve steeper in the open economy under fixed exchange rates. However, recall that the multiplier will be smaller in an open economy because of the marginal propensity to import. This would have an offsetting effect.
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Which of the following might be considered a positive externality?
A) the pollination of an orange grove due to bees kept by a nearby beekeeper B) individuals who did not get the flu, yet did not receive a flu shot when those around them did receive the shot C) better fishing resulting from increased lake temperatures generated by the nearby power plant D) All of the above are correct.
The demand curve for labor of Coca-Cola manufacturers will not shift to the right if:
a. d and e. b. the price of Coca-Cola increases. c. the firms innovate with new technology that raises labor productivity. d. the price of Pepsi decreases. e. Coca-Cola workers become unionized.
Doris, a burglar who breaks into houses, decides to break into the house at 265 Elm Street, rather than the house next door because the house next door has a sign in the yard that says "home protected by a security system." To an economist, Doris is...
What will be an ideal response?
Compared to ideal economic efficiency, when the production of a good generates external costs, competitive markets will result in an output that is too:
A. large and a price that is too high. B. large and a price that is too low. C. small and a price that is too high. D. small and a price that is too low.