In the short run, if there is a negative shock on the aggregate supply, it means
ID: 1214104 • Letter: I
Question
In the short run, if there is a negative shock on the aggregate supply, it means that: a. prices increase and output decrease b. prices decrease and output increase c. prices increase and output increase 2. In a context of a floating exchange rate regime, if the government of a small open economy implements a fiscal expansion (increase in G), the result will be: a. an increase in the nominal exchange rate due to an inflow of capital b. an increase in the nominal exchange rate due to an outflow of eapital c. a decrease in the exchange rate due to an outflow of capital 3. In a context of a fixed exchange rate regime, if the government of a small open economy implements a lax monetary policy (increase in money supply), it will not have an impact on the level of output. T F 4. When a country experience an increase in political risk, the result is often that its national currency appreciates T F 5. One of the conclusion of the Mundell-Flemming Model is that it is possible for a country to have at the same time, a free movement of capitals, an independent monetary policy and a fixed exchange rate regime T FExplanation / Answer
1. A NEGATIVE SHOCK WILL SHIFT THE SUPPLY CURVE TO THE LEFT, RESULTING IN PRICE INCREASE AND OUTPUT DECREASE.
2. (A) AN INCREASE IN THE NOMINAL EXCHANGE RATE DUE TO INFLOW OF CAPITAL.
THIS HAPPENS DUE TO A RISE IN GNP AND INCREASED INTEREST RATES, RESULTING IN INFLOW OF CAPITAL.
3. TRUE, IT WILL SHIFT THE DEMAND CURVE , AND NOT THE SUPPLY CURVE.
4. FALSE, THE POLITICAL RISK FORCES INVESTORS TO TAKE AWAY THEIR MONEY FROM THE COUNTRY, WHICH WEAKENS THE COUNTRY.
5. FALSE, THE MONETARY POLICY IS LINKED WITH THE EXCHANGE RATE AND CAPITAL MOVEMENT. THE COUNTRY CANNOT MOVE OUT OF THE WORLD MARKET INTEREST RATES.