Assume that the economy is currently in short-run equilibrium, then the dollar appreciates in the foreign exchange market. Describe the correct sequence of events that happen as the economy adjusts to a new short-run equilibrium (be sure to state what the impact would be on the price level and Real GDP)
As the dollar appreciates, foreign goods become cheaper. Americans would then increase their purchases of imported goods. When the dollar appreciates with respect to a foreign currency, the foreign currency depreciates with respect to the dollar. This would make American goods cheaper for people living in that foreign country, and they would thus purchase more U.S. exports. The combination of an increase in imports and a decrease in exports, results in a decrease in net exports. A decrease in net exports will reduce aggregate demand (AD) in the United States. This would push the AD curve leftward, resulting in a decrease in the price level and a decrease in Real GDP.
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Which of the following is likely to lead to a partial recovery after a recession?
A) A decrease in money supply B) A decrease in tax rates C) A decrease in government spending D) An increase in the interest rate
In the above figure, the aggregate demand curve is AD2, so the long-run equilibrium level of real GDP is
A) $16 trillion. B) $16.5 trillion. C) more than $16 and less than $16.5 trillion. D) None of the above answers is correct.