Use a figure to study the following question: Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD, where both the output and asset markets are out of equilibrium. Explain what will happen next
What will be an ideal response?
Since the asset market adjusts very quickly, the exchange rate drops immediately to a point on the AA schedule. There will be excess demand for the domestic currency because the high expected future appreciation rate of the domestic currency implies that the expected domestic currency return on foreign deposits is below that on domestic deposits. This excess demand leads to an immediate fall in the exchange rate.
The figure:
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Suppose that the supply curve remains unchanged. If the demand curve shifts to the right
A) the market clearing price definitely will decrease. B) the market clearing price definitely will increase. C) there will be no change in the market clearing price. D) the market will collapse.
When the unemployment rate is on the horizontal axis and the real wage is on the vertical axis, an increase in productivity will cause which of the following to occur?
A) The wage-setting and price-setting curves will both shift downward. B) The wage-setting and price-setting curves will both shift upward. C) The price-setting curve to shift downward, and no shift in the wage-setting curve. D) The wage-setting curve to shift upward, and the price-setting curve to shift downward. E) The wage-setting curve to shift downward, and the price-setting curve to shift upward.