Question

5 and 6

QUESTION 5 In the long run, with variable real exchange rates, if American goods become less attractive relative to European goods, the dollar will experience a real and a nominal depreciation; depreciation O appreciation; appreciation O depreciation; appreciation O appreciation, depreciation QUESTION 6 and output to A short-run increase in government spending causes the currency to depreciate; increase appreciate; increase appreciate; decrease O depreciate; decrease QUESTION 7 it to save and submit. Click Save All Answers to all ans

Answer 1

5.

Answer: 4^th option

Real exchange rate = RER

Nominal exchange rate = NER

Domestic price level = DPL

Foreign price level = FPL

Hence by the formula,

RER = NER × (DPL/FPL)

Since the DPL increases, domestic goods become less attractive.

The parameter of RER is (DPL/FPL).

Suppose initially: DPL = 2, and FPL = 1; therefore, (DPL/FPL) = 2/1 = 2

Suppose DPL increases to 3; therefore, therefore, (DPL/FPL) = 3/1 = 3; as it increased the RER would also be increased.

The parameter of RER is (FPL/DPL).

Suppose initially: DPL = 2, and FPL = 1; therefore, (FPL/DPL) = 1/2 = 0.50

Suppose DPL increases to 3; therefore, therefore, (FPL/DPL) = 1/3 = 0.33; as it decreased the NER would also be decreased.

6.

Answer: 1^st option

The government spending (GS) increases money supply in the economy. People would have an increasing ability to purchase. More purchase means more inflation, which reduces currency value. Therefore, currency depreciates.

The increasing purchase increases the short-run equilibrium beyond the potential level. This increases the short-run Real GDP or output.