Consider a consumer with a choice set that emerges from an exogenous income I. Suppose that, as a result of changes in a consumer's economic circumstances, the budget line rotates outward, with the vertical intercept remaining unchanged but the horizontal intercept shifting to the right. How could this have happened if the price of the good on the horizontal axis did not change?
What will be an ideal response?
If the price of the good on the vertical axis increases by the same proportion as income does. (The increase in income along causes a parallel shift outward, and the increase in the price of good 2 causes the slope to become shallower. If the two increase by the same percentage, the amount of good 2 that is affordable remains unchanged while the amount of good 1 that is affordable increases.)
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If all the countries used one common currency, we could expect that exports and imports would
a. decrease because international trade would be less needed b. decrease because each country would be producing more output c. increase because exchange rate uncertainty would be eliminated d. increase because many small countries would benefit most e. not change because trading of goods is independent of currency
Suppose the number of Euros per U.S. dollar is 1.5, the aggregate price level in Europe is 100, and the real exchange rate between the two countries is 1 . The aggregate price level in the United States is _____
a. 66.67 b. 75.57 c. 50.58 d. 60.68