Question

An economic contraction caused by a shift in the aggregate demand curve causes the price level to:

		Rise in the short run, and rise even more in the long run.
		Rise in the short run, and fall back to the original level in the long run.
		Fall in the short run, and fall even more in the long run.
		Fall in the short run, and rise back to the original level in the long run.

When the U.S. real exchange rate appreciates, U.S. goods become:

		Less expensive relative to foreign goods which makes exports rise and imports fall.
		Less expensive relative to foreign goods which makes exports fall and imports rise.
		More expensive relative to foreign goods which makes exports rise and imports fall.
		More expensive relative to foreign goods which makes exports fall and imports rise.

Printing money to finance government expenditures:

		Causes the value of money to rise.
		Imposes an inflation tax on those who hold money.
		Reduces inflation.
		Does none of the above.

According to the open economy model, trade policies such as tariffs and quotas _____ the overall trade balance.

		worsen
		improve
		may worsen or improve
		do not affect

Answer 1

1) Economic contraction will shift aggregate demand curve to its backward from AD to AD1 which will reduce the price level as well as output level from P to P1 and Y to Y1 respectively in short run. Reduction in aggregate demand in short run will induce producers to reduce their quantity supplied such that they can avoid inventories. It will take price to its initial level in long run. Option D is correct.

2) If real exchange rate appreciates, it will raise domestic price relative to foreign price which will reduce exports and raise imports. Option D is correct.

3) Printing more money will give more money in the hands of public thereby raising their willingness to pay for goods. It will raise aggregate demand in the economy. A rise in aggregate demand will raise price level which become reason of inflation. It imposes inflation tax because rise in inflation will reduce value of money and harm people who hold money. Option B is correct.

4) Traiff will raise the price of import thereby reducing the imports into the economy and benefit trade balance. Import Quota will also benefit trade balance while export quota harm trade balance. If quota here refers to imports quota, then both of them are helpful and improve trade balance. Option B is correct.