25. In the short run, a reduction in the price of oil will cause A) a reduction

Question

25. In the short run, a reduction in the price of oil will cause A) a reduction in output. B) an increase in the price level. C) a reduction in the interest rate D) all of the above E) none of the above 26. For this question, assume that the economy is initially operating at the natural level of output. An increase in the price of oil will cause which of the following in the medium run? A) a reduction in the interest rate B) a reduction in output and an increase in the aggregate price level C) a reduction in output and a reduction in the interest rate D) a reduction in unemployment, an increase in the nominal wage and an increase in the aggregate price level E) a reduction in the aggregate price level and no change in output 27. For this question, assume that the economy is initially operating at the natural level of output. A monetary expansion will cause A) no change in the real wage in the medium run. B) an increase in investment in the medium run. C) a reduction in the interest rate in the medium run. D) no change in the nominal wage in the medium run. 28. Which of the following, all else fixed, will cause the real exchange rate to increase? A) a nominal depreciation B) a reduction in the foreign price level C) a reduction in the domestic price level D) all of the above E) none of the above 29. Suppose that over the past decade, U.S. inflation is less than that in Mexico. Further assume that during this same period, the dollar depreciates relative to the Mexican peso. Given this information, A) the real exchange rate remains unchanged. B) the real exchange rate must decrease. C) the real exchange rate must increase. D) the real exchange rate can increase or remain the same, but not decrease. E) the real exchange rate can decrease or remain the same, but not increase. 30. Suppose two countries make a credible commitment to fix their bilateral exchange rate. In such a situation, we know that A) the uncovered interest parity condition no longer holds. B) the real exchange rate must be constant as well. C) each country can freely allow its interest rate to diverge from that of the other country D) the interest rate in the two countries must be equal. E) neither country will run a trade deficit.

Explanation / Answer

Ans25) C)is the correct option. a reduction in the interest rate.

Ans26) B) is the correct option. a reduction in output and an increase in the aggregate price level

Ans27) A) is the correct option. no change in the real wage in the medium run.

Ans28) B) is the correct option. A reduction in the foreign price level.

Ans29) B) is the correct option. B) the real exchange rate must decrease.

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