Econ Unit 5 & 6 Review

Suppose that the exchange rate between the United States dollar ($) and the Thai currency, baht (฿), is ฿1=$0.05. Leticia wants to buy a ฿600 souvenir from Thailand. What is the souvenir's price in dollars?

$30

An economy with limited reserves in its banking system is in short-run equilibrium as illustrated in the graph provided. Which of the following combinations of policy actions would definitely move the economy toward long-run equilibrium?

A decrease in income taxes and a central bank bond purchase

Which of the following terms describes the adverse effect that results when private sector investment spending competes with government deficit financing?

Crowding out effect

Table Year: $/£; €/£ 2015: 1.52; 0.72 2018: 1.36l; 0.87 The table shows the exchange rate for the British pound (£) against the dollar ($) and the euro (€) in 2015 and 2018. Which of the following is true?

The British pound has depreciated against the dollar.

To reduce the size of a country's national debt, a government could potentially take all of the following actions EXCEPT

finance spending by borrowing

Which of the following changes is most likely to cause economic growth?

An increase in human capital

Which of the following will most likely cause an inflow of financial capital to Canada?

An increase in the Canadian federal budget deficit

The exchange rate for one Qatari riyal was 0.5 Turkish lira in 2012, and it increased to 1.25 Turkish lira in 2018. Which of the following is true about the value of the Turkish lira in 2018 ?

1 Turkish lira = 0.8 Qatari riyal, and the Turkish lira depreciated.

Assume Country X's economy is experiencing high rates of inflation. Which of the following policies will control the problem of inflation, and what is the consequent effect on the value of Country X's currency in foreign exchange markets?

A contractionary monetary policy will increase interest rates, which will cause the currency to appreciate.

A decrease in the policy rate accompanied by a decrease in income taxes will result in which of the following in the short run?

A decrease in unemployment

An increase in the expected inflation rate will cause which of the following?

A rightward shift in the short-run Phillips curve

Which of the following will happen to aggregate demand in the United States if the United States dollar appreciates in foreign exchange markets?

Aggregate demand will decrease because net exports will decrease.

Japan and the United States are trading partners with flexible exchange rates. The currency of the United States is the dollar, and the currency of Japan is the yen. Which of the following changes in the United States will most likely increase aggregate demand in Japan?

An appreciation of the United States dollar relative to the yen

Country X's economy is in an inflationary gap. Which of the following combinations of fiscal and monetary policy actions would be most effective to restore full employment in the short run?

An increase in income taxes and an increase in the central bank's administered interest rates

Country X's International Transactions, 2018: In Millions of Dollars Exports: 235 Imports: 300 Net Income from Abroad: 20 Net Unilateral Transfers: -15 The table shows some of Country X's balance of payments data for 2018. Which of the following is true about Country X's current account balance and financial capital flows?

Country X has a current account deficit of $60 million and has net financial capital inflows.

Which of the following transactions is recorded as a credit entry in the country's current account?

Exports of consumer goods

Which of the following is recorded in a country's balance of payments accounts?

Financial capital flows between the country and the rest of the world

If economic growth through investment in the economy's infrastructure is desirable, which of the following policies will most likely achieve this objective?

Granting tax credits for businesses in the construction sector

Which of the following policies will most likely promote long-run economic growth?

Increasing funding for research and development

Suppose that Angola's economy is booming, resulting in an increase in the income of domestic residents. How will the increase in income most likely affect Angolan net exports and the foreign exchange value of the Angolan currency, the kwanza?

Net exports will decrease and the kwanza will depreciate.

Assume an economy is in long-run equilibrium and the central bank engages in an expansionary monetary policy for a prolonged time period. If the velocity of money is constant, which of the following is true according to the quantity theory of money?

Price level will increase at the same rate as the money supply.

Which of the following will most likely occur if a country's government is continuously borrowing to finance its spending without changing taxes?

Private investment in plant and equipment will decrease, resulting in a lower rate of economic growth in the long run.

Suppose a country's government increases the allowable deduction for individual retirement accounts per person. Holding all other influences constant, how would this policy action affect the country's loanable funds market, its production possibilities curve, and its long-run aggregate supply (LRAS) curve?

Private savings would increase and real interest rates would decrease in the loanable funds market, the nation's production possibilities curve would shift outward, and its LRAS curve would shift to the right.

Suppose nominal GDP is $25 million, the price level is 1.25, and the money supply is $10 million. What is real GDP and the velocity of money according to the quantity theory of money?

Real GDP is $20 million, and the velocity of money is 2.5.

Suppose that an economy with flexible wages and prices is in long-run equilibrium when the central bank contracts the money supply. What is the long-run effect on real output in the economy?

Real output is unchanged.

Which of the following describes a surplus in the government budget?

Tax revenues exceed government purchases plus transfer payments.

How will a nation's production possibilities curve (PPC) and long-run aggregate supply (LRAS) curve change as a result of an increase in both the labor force and productivity?

The LRAS curve will shift to the right, and the PPC will shift outward.

If the current exchange rate for one Swiss franc is 0.84 euro and the equilibrium exchange rate for one Swiss franc is 0.88 euro, which of the following will occur in the flexible exchange market for the Swiss franc?

The Swiss franc will appreciate.

How will an increase in private savings in the United States most likely affect financial capital flows and the value of the dollar in foreign exchange markets?

The United States will experience financial capital outflows, and the dollar will depreciate.

Steady advances in technological development will result in which of the following?

The long-run aggregate supply curve will shift to the right, resulting in a higher full employment level of output.

If tax revenues are less than the total of government spending plus government transfer payments, which of the following will happen?

The national debt will increase.

Assuming the government of a country imposes a tariff on its imports of foreign goods, what is the likely effect on the country's currency in foreign exchange markets?

The supply of the currency will decrease and the currency will appreciate.

Assume that a nation's government uses an expansionary fiscal policy to restore full employment. What effect will the resulting change in the price level have on the supply and demand of the nation's currency in the foreign exchange market?

The supply will increase and the demand will decrease.

The graph shows the foreign exchange market for the British pound (GBP). If the exchange rate is $1.70, which of the following is true?

The surplus of British pounds will cause the British pound to depreciate.

Assume policy makers increased spending and cut taxes to stimulate the economy. If the government's budget was initially in balance, which of the following will occur?

There will be a budget deficit, real interest rates will increase, and investment spending will be crowded out.

Use the graph below of the long-run Philips Curve (LRPC) and the short-run Phillips Curve (SRPC) to answer the question. Assume the economy is in long-run equilibrium. A decrease in net exports will result in which of the following in the short run?

There will be a movement from point B to point C.

The loanable funds markets in Japan and Australia are in equilibrium, as shown in the graphs above. Which of the following is most likely to happen?

There will be financial capital outflows from Japan to Australia, and the Australian dollar will depreciate.

Use the graph below of a long-run Phillips Curve (LRPC) and a short-run Phillips Curve (SRPC) to answer the question. Which of the following points illustrates an inflationary gap?

X

Unit 6 FRQ Japan and the United States are major trading partners and the exchange rate between the Japanese yen and the United States dollar is determined in a flexible foreign exchange market. (a) Assume real income increased in the United States. Draw a correctly labeled graph of the foreign exchange market for the yen, and show the effect of the increased real income in the United States on the equilibrium exchange rate for the yen. (b) Will each of the following increase, decrease, or stay the same as a result of the increase in the United States real income? (i) Japan's net exports. Explain. (ii) Unemployment in Japan. Explain. (iii) Japan's long-run aggregate supply (c) Assume instead household savings increased in the United States. Draw a correctly labeled graph of the loanable funds market in the United States, and show the effect of the increase in household savings on the equilibrium real interest rate. (d) Based on the change in the equilibrium real interest rate identified in part (c), what will happen to financial capital flows to the United States? (e) Based on your answer to part (d), what will happen to the international value of the dollar in the foreign exchange market? Explain. (f) Based on your answer to part (e), will the Federal Reserve buy or sell yen in the foreign exchange market to stabilize the dollar/yen exchange rate? Explain. **I don't know if these answers are correct**

**I don't know if these answers are correct**

Unit 5 FRQ nclude correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to "Calculate," you must show how you arrived at your final answer. An economy is currently in a recession. (a) Draw a single correctly labeled graph with both the short-run and long-run Phillips curves. Label the current short-run equilibrium as point X. (b) Is the expected inflation rate greater than, less than, or equal to the actual inflation rate? (c) Will borrowers with fixed-rate loans benefit from the situation that you identified in part (b)? Explain. (d) Assume the government budget is balanced. In the absence of any discretionary policy action, will the government budget move into surplus, deficit, or remain in balance? Explain. (e) On your graph in part (a), show how the economy will adjust in the long run in the absence of any discretionary policy action. (f) Now assume instead the government increases spending without changing taxes to close the recessionary gap. What effect will this policy have on the national debt? (g) Draw a correctly labeled graph of the loanable funds market and show the effect of the change in the national debt on the equilibrium real interest rate. (h) Based on the change in the equilibrium real interest rate identified in part (g), what will happen to economic growth in the country in the long run? Explain. **I don't know if these answers are correct**

**I don't know if these answers are correct** a) pictured b) The expected inflation rate will be less than the actual inflation rate. c) borrowers with fixed-rate loans will not benefit if the actual inflation rate is less than the original inflation rate when they originally borrowed. d) The government budget will move towards a deficit because there is no discretionary policy to keep the budget unchanged. e) pictured f) If the government increases spending without changing taxes to close the recessionary gap the national debt will increase. g) pictured h) If the national debt increases, economic growth will be hindered in the long-run because higher debt crowds out investment.