Question

____ 14.   What are the effects of a decrease in the price level?

a.	The real interest rate increases, the dollar appreciates, and net exports increase.
b.	The real interest rate increases, the dollar depreciates, and net exports decrease.
c.	The real interest rate decreases, the dollar depreciates, and net exports increase.
d.	The real interest rate decreases, the dollar appreciates, and net exports decrease.

____ 15.   What happens when the dollar appreciates?

a.	Canadian exports decrease while imports increase.
b.	Canadian exports and imports decrease.
c.	Canadian exports and imports increase.
d.	Canadian exports increase while imports decrease.

____ 16.   Which of the following government actions will shift the aggregate demand left?

a.	a decrease in taxes
b.	cuts in military expenditures
c.	signing a free trade agreement
d.	repealing an import tariff

____ 17.   What happens to prices and output when the long-run aggregate-supply curve shifts right?

a.	Prices and output both increase.
b.	Prices and output both decrease.
c.	Prices increase and output decreases.
d.	Prices decrease and output increases.

Answer 1

Ans. Option c

A decrease in the price level decreases the real money supply which causes real interest rate to fall. This decrease in interest rate will make investment by foreigners in our country less attractive due to lower rate of return. This increases net capital outflow causing depreciation of domestic currency. This makes exports to other countries cheaper but imports to home country expensive. Increasing demand for exports and decreasing the demand for importa. Increaing net exports.

Ans. Option d

Due to appreciation of dollar, there is an increase in price level of exports from USA, so, exports decrease but imports in USA from Canada increase as thwy have become relatively cheaper.

Ans. Option b

Cut in military' spending will lead to decrease in government expenses which reduces the income and hence, discouraging households to save more. This will decrease the demand for goods and services shifting the AD curve to the left.

Ans. Option d

Shift in long run aggregate supply will create a surplus of goods in the economy. This will lead to decrease in price level. This decrease in price level will encourage more consumers to buy the good. This will lead to increase the output level. So, price level decreases but output increases.

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