37. Assume the Marshall-Lerner condition holds. Which of the following will caus

Question

37. 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 38. In an open economy, an increase in government spending will cause A) a reduction in domestic output. B) a reduction in imports. C) a reduction in net exports. D) all of the above E) none of the above 39. Suppose that the rest of the world experiences an economic boom causing an increase in foreign output (Y*). This increase in Y will not cause which of the following to occur? A) the domestic country's output to increase B) the domestic country's consumption to increase C) the domestic country's output to increase and its trade balance to worsen as imports increase D) all of the above E) none of the above 40. We will generally observe that the more open an economy A) the larger the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position. B) the larger the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position C) the smaller the effect of fiscal policy on output and the larger the effect of fiscal policy on the trade position. D) the smaller the effect of fiscal policy on output and the smaller the effect of fiscal policy on the trade position. 41. 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 42. Suppose policy makers want to increase NX and keep Y constant. Which of the following policies would most likely achieve this? A) a reduction in government spending B) a real depreciation C) a reduction in government spending and a reduction in the real exchange rate D) a reduction in the real exchange rate and a tax cut

Explanation / Answer

Ans 37)

Option D)

Becasue according to Marshall-Lerner conditions a reduction in exchange rate will cause real depreciation hence increase the net exports

Ans 38)

Option C)

Increase in government spending will increase the output which will increase the demand for import hence net export will decrease

Ans 40)

Option C) is correct response

Ans 41)

Option B is correct response

As real depreciation will make domestic goods cheaper which in turn increase export and output

Ans 42)

Option C is correct response

A reduction in government spending will help to decrease output and reduction in exchange rate will make goods cheaper hence export will increase therfore NX and ultimately increased output will be at same level as it was before this change

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