Question

1. What is the link between the budget deficit and the trade deficit?

		Government borrowing from the budget deficit leads to higher real interest rates which cause foreigners to invest in the U.S. which increase the international value of the dollar causing imports to rise and exports to fall....i.e. trade deficit.
		Government borrowing from the budget deficit leads to higher real interest rates which cause foreigners to pull their money out of the U.S. due to its cost which decrease the international value of the dollar causing imports to rise and exports to fall....i.e. trade deficit.
		There is no relationship between the budget deficit and trade deficit.
		Government borrowing from the budget deficit leads to lower real interest rates which cause foreigners to invest in the U.S. which decrease the international value of the dollar causing imports to rise and exports to fall....i.e. trade deficit

2. The portfolio theories of money demand state that the demand for real money balances is ________ related to income and ________ related to the nominal interest rate.

		negatively; positively
		negatively; negatively
		positively; positively
		positively; negatively

3. The quantity theory of inflation indicates that if the real GDP is growing at 3% per year and the growth rate of money is 5%, then inflation is

		-2%.
		1.6%.
		8%.
		2%.

4.

Suppose the central bank has high credibility and aggregate demand shifts rightward due to an unexpected positive demand shock increasing inflation:

		the economy moves quickly from point "1" to point "2" and then slowing to point "3"..
		the economy moves from point "1" to point "2" and then returns to point "1).
		the economy moves from point "1" to point "3".
		the economy stays at point "1".

Answer 1

Answer 1: Option A.

Government borrowing from the budget deficit leads to higher real interest rates which cause foreigners to invest in the U.S. which increase the international value of the dollar or the dollar appreciates and this reduces the prices of imports and increases the price of exports causing imports to rise and exports to fall....i.e. trade deficit.

Answer 2:

Option D. The portfolio theories of money demand state that the demand for real money balances is positively related to income and negatively related to nominal interest rate.

Answer 3:

Option D. The rate at which inflation occurs = Growth in the real money supply - Growth in real GDP = 5 - 3 = 2 per cent.

Answer 4:

The graph showing these points is missing.