I. Multiple-choice questions (0.5 points each). Choose the best and complete ans
ID: 1142466 • Letter: I
Question
I. Multiple-choice questions (0.5 points each). Choose the best and complete answer, even if multiple choices may appear to be correct. Circle your selected answer. 1. Assume the Marshall-Lerner condition holds. Which of the following will cause an increase in net exports? A. An increase in government spending. B. An increase in investment. C. A reduction in foreign output. D. A reduction in the real exchange rate. E. All of the above. 2. Which of the following will always cause an increase in net exports? A. A reduction in domestic output. B. An increase in the real exchange rate. C. An increase in government spending. D. An increase in investment. E. All of the above. 3. For an open economy, which of the following expressions represents private saving (S)? A. I+T- G+CA. B. I+T-G-CA. C. I+G-T+CA. D. G-T+CA-I E. None of the above. 4. Suppose policy makers want to increase Y and increase NX. Which of the following policies would most likely achieve this? A. An increase in government spending. B. A real depreciation. C. A reduction in taxes and an increase in the real exchange rate. D. An increase in the real exchange rate. 5. In a flexible exchange rate regime, if the foreign interest rate (i*) becomes lower, on the IS. LM diagram the interest parity curve A. shifts (moves) to the left, and becomes flatter. B. shifts (moves) to the left, and becomes steeper. C. shifts (moves) to the right, and becomes steeper. D. shifts (moves) to the right, and becomes flatter. E. remains unchanged.Explanation / Answer
1).
According to the “Marshall-Lerner” condition the sum of “import and export elasticity” must be more than “1”. So, under this condition “real devaluation” leads to improve the “trade balance”, => “Net export” will improve.
So, here the correct answer is “increase in real exchange rate” or “real devaluation of exchange rate”. So, here the correct option is not given.
2).
Similarly, with the same logic the “NX” will improve as a result of “increase in real exchange rate”, => correct option is “B”.
3).
Now, the national income identity is given by, “Y = C+I+G+NX”, where “NX=CA”.
=> Y = C+I+G+CA, => Y-C-G = I+CA, => (Y-T-C)+(T-G) = I+CA, where “(Y-T-C)+(T-G)” is national savings and “(Y-T-C)” is private saving of a home country. So, here the correct answer is “none of the above”. So, the correct option is “E”.
4).
Suppose the policy maker wants to increase “Y” and increase “NX”. As we know that “Y” is sum of “C+I+G+NX”. Now, “NX” is the function of “Y*, e”, where “Y*” be the foreign income and “e” be the “real exchange rate”, => as “e” increases, => “make export cheaper” and import expensive, => “NX” will increase. So, as “e” increases implied “NX” also increases which intern increase “Y”, => the correct option is “B”.
5).
Now, the interest parity condition is given by, “(1+i) = (1+i*)*(Eet/Et+1)”, where “E” be the exchange rate. So, here as “i*” decreases implied for each given “i", “i*” decreases, => the interest rate parity curve will shift right side and get flatter. So, here the correct answer is “D”.