ECON 3580 Lecture Notes - Lecture 11: Exchange Rate, Disposable And Discretionary Income, Aggregate Demand

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17 Jul 2018

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Introduction: long-run models are useful when all prices of inputs and outputs have time to adjust. It shows how macroeconomic policies can affect production, employment, and the current account. How real exchange rate changes affect the current account: the current account measures the value of exports relative to the value of imports, ca ex im. When the real exchange rate ep*/p rises, the prices of foreign products rise relative to the prices of domestic products. The volume of exports that are bought by foreigners rises. The volume of imports that are bought by domestic residents falls. The value of imports in terms of domestic products rises: the value/price of imports rises, since foreign products are more valuable/expensive. If the volumes of imports and exports do not change much, the value effect may dominate the volume effect when the real exchange rate changes. Real exchange rate: an increase in the real exchange rate increases the current account.

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Please help wtih these economics questions. I'll give the best answer to the person who justifies their answer.. or someone who does well in economics and knows the subject area well.

Which of the following statements is not true about Say's Law?

A. People produce more goods than they want for their own use only if they seek to trade them for other goods.

B. Markets would be regularly hit by severe shortages and surpluses.

C. Desired expenditures will equal actual expenditures.

D. Surpluses will be eliminated by falling prices and shortages will be eliminated by increasing prices.

Which of the following is not an assumption of the classical model?

A. Buyers and sellers react to changes in relative prices.

B. Households want to maximize economic well being.

C. Wages and prices will move freely in the upward direction but not the downward direction.

D. No single buyer or seller of a commodity can affect its price.

Money illusion is

A. when people think they are better off when their income increases even though prices have increased by the same amount.

B. when people are motivated by self-interest.

C. could not exist if the economy did not have competitive markets.

D. a basic condition that all classical economists assume people have.

Saving is not a problem in the classical model because

A. interest rates were flexible and savings were channeled into investment.

B. savers and investors were the same people.

C. the classical economists assumed that saving was beneficial to people for retirement.

D. saving would be spent by consumers eventually.

Which of the following statements is true?

A. There is an inverse relationship between investment and the interest rate.

B. There is no relationship between investment and the interest rate.

C. There is a direct relationship between investment and the interest rate.

D. Investment is always less than savings.

In the classical model, high unemployment due to either a demand or a supply shock

A. will return to its normal level quickly as wages adjust.

B. will persist if due to a supply shock but not if due to a demand shock.

C. can persist for an indefinite period of time.

D. never exists because unemployment can never deviate from its normal level.

The classical model makes little distinction between the long-run and short-run because

A. the model has not been fully developed yet.

B. prices adjust so fast that the economy is quickly moving towards the long-run.

C. the classical economists knew that we are always operating in the short run.

D. current changes influence the long run, so it is not possible to plan for the future.

In the classical model

A. the level of real GDP per year does not depend on the level of aggregate demand.

B. the level of GDP is demand determined.

C. the level of GDP determines prices independent of demand.

D. changes in aggregate supply affect the price level, not real GDP.

Which of the following is a true statement?

A. Classical economists believed output adjusted more than prices when aggregate demand fell while Keynes believed prices adjusted more than output.

B. Classical economists believed price adjusted more than output when aggregate demand fell while Keynes believed output adjusted more than prices.

C. A decrease in aggregate demand has no short-run effects according to the classical economists, but had significant effects according to Keynes.

D. A decrease in aggregate demand was not possible according to the classical economists, but was possible according to Keynes.

Which of the following is not a reason why GDP can be expanded beyond a level consistent with its long-run growth path in modern Keynesian analysis?

A. Prices and wages are flexible allowing for needed adjustments.

B. In the short-run existing workers can work more hours.

C. The existing capital stock can be used more intensively.

D. Higher prices induce firms to hire more workers.

A recessionary gap can be caused by

A. a decrease in aggregate supply holding aggregate demand constant.

B. an increase in aggregate demand holding aggregate supply constant.

C. an increase in the long run aggregate supply curve holding the aggregate demand constant.

D. a decrease in both aggregate demand and aggregate supply.

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2.) In a simple economy (assume there are no taxes; thus, Y is disposable income), the consumption is C=50+0.80 Y. The current level of real GDP is $3000.

At this level of real GDP, consumption will be $___, and savings will be $___. If GDP were to increase by $1000, consumption would increase by $___. (Round off response to nearest dollar.)

At a real GDP level of $3000, the average propensity to conumer is $___, and the average propensity to save is ___. (Round off response to nearest dollar.)

11.) In the short run, if the economy has a recessionary gap, an increased government deficit resulting from higher government spending or lower taxes is most likely to :

a) increase aggregate demand, which will move the economy toward full employment real GDP

b) have no effect on aggregate demand or real GDP after direct and indirect offsets are counted

c) increase aggregate demand, raising prices and creatring an inflationary gap

d) decrease aggregate demand, reducing prices and increasin the recessionary gap

14.) The Federal reserve purchases $9 million in uS Treasury bonds from a bond dealer, and the dealer's bank credits the dealer's account. The required reserve ratio is 17 percent , and the bank typically lends any excess reserves immediately. Assuming that no currency leakage occurs, calculate how much much will the bank be able to lend to its customers following the fed's purchase. $ __ million. (round off to 2 decimal points)

18.) According to the quantity theory of money, the prices, a -3% change in the money supply, holding other variables constant leads to a

a) -3% changee in real GDP

b) -3% change in the interest rate

c) -3% change in the price level

d) a greater than -3% in real GDP

24. Over the course of a year, a nation tracked its foreign transactions and arrived at the following amounts:

Merchandise exports 500

service exports 75

net unilateral transfers 10

domestic assets abraod (capital outflows) -200

foreign assets at home (Capital inflows) 300

changes in official reserves -35

merchandise imports 600

service imports 50

This nations' blance of trade is ______

Its current account balance is ______

The nation's capital account balance is _____

27. Major discoveries of the highest-quality dia-monds ever found occur in Russia andCentralAsia, causing a significant decline in purchases ofSouth African diamonds. Moreover, assume a floating exchange rate.

Describe how the market for the rand is impacted by this event. Will demand shift to the left? Will supply remain the same? Or will supply change?

1. In which market will a company arrange to receive currency for a transaction at a future date?

Select one:

a. the forward market

b. the currency futures market

c. the arbitrage market

d. the forward spot market

2. The U.S. dollar is overvalued and the peso is undervalued in the foreign exchange market

Select one:

a. if a visitor to Mexico from the United States can buy more goods in the United States
than he can buy in Mexico when he converts dollars to pesos.

b. if a visitor to Mexico from the United States can buy the same amount of goods in
Mexico as he can buy in the United States when he converts dollars to pesos.

c. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts pesos to dollars.

d. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts dollars to pesos.

3. Given the following data (t is current time; t+1 is time after one period)

E_t = Â¥ 110 = $1

E_t+1 = Â¥ 95 = $1

Current Interest rate in the US = i_US= 8%

If the interest parity condition is expected to hold, interest rates in Japan (i_Japan) should equal approximately:

Select one:

a. 3.38%

b. 8%

c. -5.64%

d. None of the above.

4. Suppose the Japanese interest rate is I% while the interest rate in Britain is 3%. Interest rate parity predicts that relative to the Japanese Yen,

Select one:

a. the British pound will depreciate by 4%.

b. the British pound will appreciate by 2%.

c. the British pound will depreciate by 2%.

d. the British pound will appreciate by 4%.

5. Suppose the U.S. grows more slowly than Canada. The best medium term prediction is that the

Select one:

a. U.S. interest rates will rise.

b. U.S. dollar will appreciate against the Canadian dollar.

c. U.S. dollar will depreciate against the Canadian dollar.

6. Purchasing Power Parity (PPP) implies that

Select one:

a. In the long run, a forward exchange rate can purchase an interest rate swap for the same
price as the spot rate.

b. In the medium run, a forward exchange rate can purchase an interest rate swap for the
same price as the spot rate.

c. The short run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

d. the long run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

7. The current account balance will fall if

Select one:

a. the real exchange rate depreciates and disposable income goes up

b. the real exchange rate appreciates or disposable income goes up

c. the real exchange rate depreciates or disposable income goes down

d. the real exchange rate appreciates and disposable income goes down

8. A person who paid $10 for an umbrella in the U.S. sees the exact same umbrella in a store in London, England for 6 British pounds. If the person could expect the real exchange rate to be 1 U.S. umbrella per 1 English umbrella, then the person could infer that the nominal exchange rate is

Select one:

a. 0.6 U.S. dollars per 1 English pound.

b. 1.67 U.S. dollars per 1 English pound.

c. 0.6 English pounds per I U.S. dollar.

d. 1.67 English pounds per 1 U.S. dollar.

9. A U.S. wine merchant travelling in France has found a French wine of the same quality as a U.S. wine they regularly sell. She assumes that the real exchange rate should be 1 case of U.S. wine equals one case of French wine. The French wine merchant will sell her a case of the French wine for 350 euros. She knows that a case of the equivalent U.S. wine sells for $400. The euro is selling in France for $1.20. Assuming transportation costs are zero, the U.S. wine merchant should

Select one:

a. buy the French wine and sell it in the U.S. and make a profit.

b. buy the U.S. wine and sell it in France and make a profit.

c. It doesn't matter either way; there is no profit in the deal.

d. None of the above.

10. In a fixed exchange rate system, how do countries address the problem of currency market pressures that threaten to lower or raise the value of their currency?

Select one:

a. If demand falls, then countries must increase demand by buying up the excess supply
with domestic currency.

b. If demand rises, countries must fill the excess demand for foreign currency by selling
their reserves.

c. If demand rises, then countries can adjust the value of the exchange rate to the desired
level.

d. A and B only.

ECON 3580 Lecture Notes - Lecture 11: Exchange Rate, Disposable And Discretionary Income, Aggregate Demand

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