Q: Suppose the nominal exchange rate between the U.S. dollar and the euro is $$1.20/\euro$$, the U.S. price level is $$P_{US} = 120$$, and the European price level is $$P_{EU} = 100. $$What is the real exchange rate ($$RER) $$from the U.S. perspective?

$$RER = \frac{E \times P_{EU}}{P_{US}} = \frac{1.20 \times 100}{120} = 1$$

Question 1

Suppose the government increases its spending by $100 billion, and the marginal propensity to consume (MPC) is 0.8. What is the total change in aggregate demand, assuming no crowding out and no taxes?

Accepted Answer

$$\500$ billion

Question 2

Which of the following best describes an automatic stabilizer in fiscal policy?

Accepted Answer

A policy that automatically increases government spending or decreases taxes when the economy contracts, such as unemployment insurance.

Question 3

If the government runs a budget deficit, which of the following is necessarily true?

Accepted Answer

Government expenditures exceed government revenues.

Question 4

Suppose the economy is experiencing high inflation. Which fiscal policy would be most appropriate to address this issue?

Accepted Answer

Contractionary fiscal policy, such as increasing taxes or reducing government spending.

Question 5

Which of the following best explains the concept of 'crowding out' in the context of fiscal policy?

Accepted Answer

Government borrowing increases interest rates, reducing private investment.

Question 6

The Phillips curve illustrates the relationship between which two economic variables?

Accepted Answer

Inflation and unemployment

Question 7

If the central bank adopts a policy of disinflation, what is the likely short-run effect on unemployment according to the Phillips curve?

Accepted Answer

Unemployment will increase.

Question 8

Suppose the natural rate of unemployment is 5%. If actual unemployment falls to 3%, what does the Phillips curve suggest will happen to inflation in the short run?

Accepted Answer

Inflation will increase.

Question 9

Which of the following is a key difference between rational expectations and adaptive expectations in macroeconomic models?

Accepted Answer

Rational expectations assume people use all available information, while adaptive expectations rely on past experiences.

Question 10

In the real business cycle (RBC) model, what is the primary source of economic fluctuations?

Accepted Answer

Real shocks, such as changes in technology or productivity

Question 11

A country has the following balance of payments data (in billions): Current account: $$-50$$, Financial account: $$+60$$, Capital account: $$+5. $$What is the statistical discrepancy?

Accepted Answer

$$-15$$

Question 12

Which of the following transactions would be recorded in the current account of a country's balance of payments?

Accepted Answer

A U.S. company exports cars to Germany.

Question 13

If a country experiences a net capital inflow, what must be true about its current account balance?

Accepted Answer

It has a current account deficit.

Question 14

Suppose the nominal exchange rate between the U.S. dollar and the euro is $$1.20/\euro$$, the U.S. price level is $$P_{US} = 120$$, and the European price level is $$P_{EU} = 100. $$What is the real exchange rate ($$RER) $$from the U.S. perspective?

Accepted Answer

$$RER = \frac{E 	imes P_{EU}}{P_{US}} = \frac{1.20 	imes 100}{120} = 1$$

Question 15

If the U.S. dollar appreciates relative to the Japanese yen, what is the likely effect on U.S. net exports?

Accepted Answer

U.S. net exports will decrease.

Question 16

Which of the following best describes purchasing power parity (PPP)?

Accepted Answer

The exchange rate should adjust so that identical goods cost the same in different countries.

Question 17

Suppose the government increases its budget deficit. According to the saving and investment equation in an open economy, what is the likely effect on net exports?

Accepted Answer

Net exports will decrease.

Question 18

Which of the following would cause the demand for a country's currency to increase in the foreign exchange market?

Accepted Answer

An increase in foreign demand for the country's exports.

Question 19

If a country operates under a fixed exchange rate system, what must its central bank do to maintain the fixed rate when there is excess demand for its currency?

Accepted Answer

Sell its own currency and buy foreign currency.

Question 20

A speculator expects the euro to appreciate against the U.S. dollar. Which of the following actions is the speculator most likely to take?

Accepted Answer

Buy euros and sell U.S. dollars.

Macroeconomics Study Guide: Fiscal Policy, Inflation & Unemployment, and Open Economy

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