Explain why the demand for domestic goods curve (ZZ) has a different shape than the domestic demand curve (DD)
What will be an ideal response?
The marginal propensity to import explains this. As Y increases, C and I will increase causing an increase in DD. Some of this increase in demand is for foreign goods. This must be subtracted from DD to obtain ZZ. So, a given increase in Y will have a larger effect on DD than it will on ZZ.
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The menu cost theory suggests that
A) wages and prices move freely and quickly. B) the economy is characterized only by perfect competition. C) there will be no unemployment. D) firms find frequent price changes to be costly.
The supply of domestic assets ________
A) is insensitive to changes in the nominal exchange rate B) rises when the nominal exchange rate rises C) falls when the nominal exchange rate rises D) equals the value of exports minus the value of imports
The exchange rate is
a. the rate at which one currency is traded for another b. always constant c. the tax a foreign nation imposes to change its currency into dollars d. irrelevant to those who do not travel to foreign countries e. controlled by the Federal Reserve
The economy pictured in the figure below has a(n) ________ gap with a short-run equilibrium combination of inflation and output indicated by point ________. 
A. recessionary; B B. recessionary; C C. recessionary; A D. expansionary; A