8. Imagine a Small open economy in the Classical theory. What happens to NX and

Question

8. Imagine a Small open economy in the Classical theory. What happens to NX and real exchange rate if aggregate savings go down?

a) NX goes into deficit and real exchange rate rises.

b) NX goes into deficit and real exchange rate falls.

c) NX goes into surplus and real exchange rate rises.

d) NX goes into surplus and real exchange rate falls.

9. Imagine that the economy is at the intersection of LRAS, SRAS and AD curves. Suppose that a shock lowers the SRAS curve. What kind of stabilization policy can be taken to return the economy to the long run level of Y?

a)Raise money supply

b)Lower money supply

c)Keep money supply unchanged

d)None of the above

10. Actual Expenditure < Planned Expenditure means that firms will

a)Raise production

b)Lower production

c)Keep production unchanged

d)None of the above

Explanation / Answer

a) In a situation where the saving goes down, the consumption will increase and it will increase the import in the nation. With higher import, the outflow of national currency will increase and it will depreciate and there will be a deficit. The answer is "B".

b) With a lower SRAS curve the price will fall and demand will increase, its a positive supply shock and the FED doesn't need to intervene. They will keep the money supply unchanged. The answer is "C".

c) When the actual expenditure is lower than the planned expenditure the inventory will rise and the firms will need to reduce the production. The answer is "B".

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