Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect an increase in foreign output (Y*) will have on the domestic economy. In your graphs, clearly label all curves and equilibria
What will be an ideal response?
An increase in Y* will cause an increase in X and NX. This causes the IS curve to shift to the right As demand rises, production will increase. The increase in Y will cause an increase in money demand. As money demand rises, i will rise causing an appreciation. So, some of the effects of Y* on NX will be offset by the decrease in NX caused by the appreciation. We will observe an increase in NX, an increase in Y, an increase in i, and an increase in E.
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The components of M2 that are not also in M1:
A. pay lower rates of interest than do the components of M1. B. sum to an amount that is smaller than the sum of the components of M1. C. are usable for making payments, but at a greater cost or inconvenience than currency or checks. D. are not usable for making payments.
A recent study indicated that "Stricter college alcohol policies such as raising the price of alcohol, or banning alcohol on campus, decreases the number of students who use marijuana"
This indicates that the cross-price elasticity between alcohol and marijuana is positive. Indicate whether the statement is true or false
Suppose that a worker in Country A can make either 10 iPods or 5 tablets each year. Country A has 100 workers. Suppose a worker in Country B can make either 2 iPods or 10 tablets each year. Country B has 200 workers. A bundle of goods that Country A could not make would be:
A. (500 iPods, 150 tablets). B. (500 iPods, 200 tablets). C. (500 iPods, 250 tablets). D. (500 iPods, 300 tablets).
For this question, assume that policy makers are pursuing a fixed exchange rate regime. Now suppose that households decide to decrease consumption because of, for example, a reduction in consumer confidence. Given this information, we would expect which of the following to occur?
A) a reduction in the domestic interest rate B) an increase in E C) a reduction in E D) a reduction in investment E) none of the above