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Question 01

According to the Principle of Purchasing Power Parity (PPP) for a regime of fixed exchange rates: In the long run there can be (A) _________ deviations between domestic and foreign inflation rates. If not, the real exchange rate would (B) _________ .

a) (A) no; (B) appreciate or depreciate without end.

b) (A) no; (B) equal the nominal exchange rate.

c) (A) constant; (B) appreciate or depreciate without end.

d) (A) constant; (B) equal the nominal exchange rate.

Question 02

For a small economy in a fixed exchange rate system, which of the following factors would not shift the AD curve?

a) Tobin's q.

b) The price level.

c) (Y*)

d) Household wealth (W)

Question 03

For a small economy in a fixed exchange rate system in the long run, the domestic core rate of inflation must equal the foreign rate of inflation because:

a) otherwise the real exchange rate would change.

b) the Principle of Purchasing Power Parity would be violated.

c) this is inconsistent with Okun's Law.

d) each must equal the domestic rate of inflation so that AS does not shift and the relative competitiveness of domestic goods does not change.

Question 04

For a small economy in a fixed exchange rate system that begins in period 0 at the long-run equilibrium point A, the government cuts net taxes moving the aggregate demand curve from its initial position AD to AD´ so that the economy is in short-run equilibrium in period 1 at point B. Assume the backward looking component of core-inflation dominates the forward looking component.

Consider two possible scenarios for period 2: Scenario (i) is that fiscal policy remains expansive so aggregate demand remains at AD´. Scenario (ii) is that fiscal expansion is cancelled and aggregate demand returns to AD. For both scenarios you may assume that the aggregate supply curve has shifted up to AS´ in period 2.

Besides the obvious differences in inflation and output gap between the points C and D, we note:

a) in scenario (i) aggregate supply in period 3 will shift above AS´ but below point E; in scenario (ii). it will shift to pass through point A again.

b) in scenario (i) aggregate supply in period 3 will shift above AS´ but below point E; in scenario (ii).it will shift below AS´ but above point A.

c) in scenario (i) aggregate supply in period 3 will shift to pass through point E; in scenario (ii).it will shift below AS´ but above point A.

d) The left hand side alpha is the union's preferred wage share where as the alpha-bar term is the employer's preferred wage share.

Question 05

For a small economy in a fixed exchange rate system that begins in period 0 at the long-run equilibrium point A, the home country's central bank chooses to devalue its currency and as a consequence the aggregate demand curve shifts from AD to AD´.

At the new (lower) fixed nominal exchange rate, Point B is not sustainable because domestic inflation now exceeds foreign inflation and the real exchange rate (A) _________ the current account deteriorates, and the IS curve shifts (B) _________ with (C) _________ shift of the LM curve. This results in a leftward shift of AD.

a) (A) starts rising; (B) leftward; (C) a leftward

b) (A) starts rising; (B) leftward; (C) no

c) (A) starts falling; (B) leftward; (C) a leftward

d) (A) starts falling; (B) leftward; (C) no

Question 06

For a small economy in a flexible exchange rate system that begins in period 0 at the long-run equilibrium point A, a faster rate of growth of the money supply shifts aggregate demand from AD to AD´. The new long run equilibrium for this economy will be at point:

a) A

b) B

c) C

d) D

Question 07

For a small economy in a flexible exchange rate system that begins in the long-run equilibrium point, a fiscal expansion leaks abroad because a real (A) _________ leads to a worsening of the primary current account. The aggregate demand curve (B) _________ .

a) (A) depreciation; (B) shifts right.

b) (A) depreciation; (B) does not move.

c) (A) appreciation; (B) shifts right.

d) (A) appreciation; (B) does not move.

Question 08

For a small economy that begins in a long-run equilibrium at point A there is an adverse supply shock that shifts the short run aggregate supply curve from AS to AS´. If wage negotiators know that there will be a strong anti-inflation policy response to the supply shock and its aftermath, then the ultimate path of the economy will look like a movement from _________ .

a) A to B to A

b) A to E to A

c) A to B to A

d) A to E to D

Oxford University Press, Online Resource Centre, Chapter 13.

Chapter 13

Instructions