Question

A monetary expansion will:

	decrease the interest rate in the short run, but increase it in the medium run.
	increase output in the short run and in the medium run.
	increase the interest rate in the short run and in the medium run.
	increase the price level in the short run and in the medium run.
	increase output in the short run, but reduce it in the medium run.

In which of the following cases will the real exchange rate decrease?

	a nominal appreciation of the domestic currency
	a decrease in the domestic price level
	an increase in the interest rate
	an increase in the foreign price level
	more than one of the above

A decrease in government spending will, in the medium run, cause an increase in:

	the price level.
	output.
	taxes.
	investment.
	none of the above.

Suppose i = 5%, i* = 8%, and that the domestic currency is expected to appreciate by 5% during the coming year. Given this information, we know that:

	individuals will be indifferent about holding domestic or foreign bonds.
	individuals will only hold domestic bonds.
	the interest parity condition holds.
	individuals will only hold foreign bonds.
	more than one of the above

When the actual price level is greater than the expected price level, we know that:

	output is less than the natural level of output.
	the real exchange rate is equal to the nominal exchange rate.
	the goods market is in equilibrium.
	the unemployment rate is greater than the natural rate of unemployment.
	none of the above.

Answer 1

Answer to the question no. 1:

Option b: Increase output in the short run and in the medium run.

Explanation: A monetary expnasion increases the money supply in the economy, which result in the fall in the interest rate in the economy. This fall in the interest will be in the short and medium rum and this will boost the investment in the short and the medium run. Increase in the investment will raise the level of income of the people and thus the Aggregate demand in the short and medium run.

Answer to the question no. 2:

Option b & d: A decrease in the domestic price level & an increase in the foreign price level.

Explanation: When the domestic price level falls in relation to the foreign price level or the foreign price level ries in relation to the domestic price level the domestic commodities bocome relatively cheaper than the foreign goods. So, in this case, in real term the foreigners can import less from us in retum of their g=commodity. So, this way the real exchange rate rises.

Answer to the question no. 3:

Option e: None of the above.

Explanation: When the government spending is decreased, in the medium run, it will increase the output and reduce the price level since it reduce the aggregate demand of the economy. Investment (induced) is not affected by the government expenditure.

Answer to the question no. 4:

Option d: Individuals will only hold domestic bonds.

Explanation: If the domestic interest rate (i) is less than the foreign interest rate (i*) the domestic investor shold invest in the forein bonds as long as the appreciation of the domestic currency or the depreciation of the foreign currency is equal to the interest rate differential (i* - i). In our example, since the interest rate differential is 3% (i* - i) and the domestic currency is expected to appreciate by 5%, the domestic investor must invest in the domestic currency since because the depreciation of the foreign currency or appreciation of the domestic currency (5%) is greater to the interest rate differential (3%).

Answer to the question no. 5:

Option d: None of the above.

Explanation: In such situation the firm become happy and they start producing more. The current output will become more than the potential output, this will raises the demand for the labour and unemployment falls in the economy. Also, this expansion will also creates demand for other resources by the firm as will. This will raise the price of the other inputs also.

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