Explain the following figure:
What will be an ideal response?
The figure depicts the effect of a permanent increase in the money supply starting from full employment equilibrium. After the initial increase in the money supply and the move of the AA curve to the right from AA1 to AA2, a steadily increasing price level shifts the AA and the DD schedules to the left until a new long-run equilibrium is reached. Note that point 3 is above point 1, because Ee is permanently higher after a permanent increase in the money supply. The expected exchange rate, Ee, has risen by the same percentage as Ms. Notice that along the adjustment path between the initial short-run equilibrium (point 2 ) and the long-run equilibrium (point 3 ) the domestic currency actually appreciates (from E2 to E3 ) following its initial sharp depreciation (from E1 to E2).
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Refer to Figure 5-4. What does S1 represent?
A) the market supply curve that reflects private cost B) the market supply curve that reflects only private benefit C) the market supply curve that reflects only external cost D) the market supply curve that reflects social cost
Judging from the circular flow diagram, what happens to dollars that households earn as wages?
a. They are given to other households in the form of tax distributions. b. They are given to firms in exchange for capital and labor. c. They are recycled back to firms when households buy products and services. d. They are removed from the simple circular flow diagram, making the circle smaller.
Suppose the economy is initially experiencing a recessionary gap. A reduction in the size of the budget deficit will cause which of the following in the short run?
A. an increase in the size of the recessionary gap and decrease in real GDP. B. a reduction in the size of the recessionary gap and increase in real GDP. C. an inflationary gap. D. an increase in inflation and increase in aggregate supply.
A financial intermediary that has existed throughout recorded history.
Answer the following statement(s) true (T) or false (F)