Macroeconomics Problems?
1.Other things the same, as the price level rises, exchange rates
a)and interest rates rise.
b)and interest rates fall.
c)Fall and interest rates rise.
d)rise and interest rates fall.
I know for certain that as the price level increases, the interest rate increases, so it must be either option a or option c. I believe exchange rates also increase when the price level and interest rate increases, but I am not 100% sure, so I would like for someone to confirm if it is option a or option c. The other following two questions I don’t know as much about, so I would appreciate some help with them.
2. A government budget deficit
a)increases both net capital outflow and net exports.
b)decreases both net capital outflow and net exports.
c)increases net capital outflow and decreases net exports.
d)Decreases net capital outflow and increases net exports.
3. Assume a central bank follows a rule that requires it to take steps to keep the price level constant. If the price level rose because of an increase in aggregate demand and a decrease in aggregate supply that kept output unchanged, then
a)the central bank would have to decrease the money supply which would decrease output.
b)The central bank would have to decrease the money supply which would increase output.
c)the central bank would have to increase the money supply which would decrease output.
d)The central bank would have to increase the money supply which would increase output
Answer:
Q1. a the interest rate will rise due to the nominal money supply will decrease. Therefore, the higher price level must lead to the higher interest rate. The exchange rate must go up as the interest rate is high due to the inflow of investment from oversea.
Q2. C
Q3. a
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