Assuming sticky prices and given expectations of future exchange rates, what is the short-run effect on the exchange rate of the U.S. dollar (purchasing euros) and on domestic and foreign rates of return if there is a temporary increase in the quantity of euros?
a. Rates of return on domestic and foreign assets diverge, as the dollar appreciates.
b. Domestic and foreign rates of return both fall, as the dollar depreciates.
c. Domestic and foreign rates of return converge, as depreciation of the euro raises r turns for U.S. investors who purchase euro-based assets.
d. Rates of return on dollar assets fall, causing investors to switch into euro assets and, therefore, the U.S. dollar depreciates against the euro
Answer: c. Domestic and foreign rates of return converge, as depreciation of the euro raises r turns for U.S. investors who purchase euro-based assets.
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Suppose an economist advises a city's mayor to begin charging drivers a fee to drive on a busy highway during congested times. The mayor does not implement the policy because it would not be popular with voters. Which of the following statements best describes the scenario?
a. This is a common occurrence. The policymaker knows the best policy but chooses not to institute it for other reasons. b. This is a common occurrence. The policymaker usually disregards an economist's advice because they do not believe it is the most efficient policy. c. This is an unlikely occurrence. Most of the time, policymakers follow the advice of economists and institute the most efficient policies. d. This would never happen. Policymakers always follow the advice of economists.