Analyze the short-run and long-run effects of an unanticipated decrease in the money supply in the misperceptions model. Tell what happens to output, the price level, and the expected price level in both the short run and long run
What will be an ideal response?
The reduction in money supply shifts the AD curve left, reducing output and the price level, while the expected price level is unchanged, since the decrease in money supply was unanticipated. In the long run, the SRAS curve shifts down as people reduce their expected price level. The economy returns to full-employment output, but at a lower price level.
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The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory. In July 2015, the Economist reported that the average price of a Big Mac in the United States was $4.79
In Mexico, the average price of a Big Mac at that time was 49 pesos. If the exchange rate between the dollar and the peso was 13.60 pesos per dollar, how would purchasing power parity predict the exchange rate will change in the long run? Support your answer graphically.
The EU countries were prompted to seek closer coordination of monetary policies and greater exchange rate stability in order
A) to enhance Europe's role in the world monetary system. B) to turn the European Union into a truly unified market. C) both to enhance Europe's role in the world monetary system and to turn the European Union into a truly unified market. D) both to turn the European Union into a truly unified market and to counter the rise of Japan in international financial markets. E) to homogenize all European cultures.