Question: 1. Assume that policy makers are pursuing a fixed exchange rate regime and the economy is initially operating at the natural level of output. Which of the following will occur as a result of a revaluation? Select one:

a. The real exchange rate will be permanently higher in the medium run.

b. The effects of this revaluation on the real exchange rate will be ambiguous in the medium run.

c. The real exchange rate will be permanently lower in the medium run.

d. The nominal exchange rate will initially fall in the short run and then increase in the medium run.

e. The real exchange rate will be unchanged in medium run.

2. Assume that there is a simultaneous increase in government spending and monetary contraction. In a flexible exchange rate regime, we know with certainty that such a policy mix will cause which of the following? Select one:

a. a reduction in net exports

b. an increase in the exchange rate

c. an increase in the domestic interest rate

d. All of the above.

e. Only A and B.

3. Suppose a country switches from a flexible to a fixed exchange rate. Which of the following will occur as a result of this change? Select one:

a. Both fiscal and monetary policy will become more effective in changing GDP.

b. Both fiscal and monetary policy will become completely ineffective in changing GDP.

c. Monetary policy will become a more effective tool for changing output.

d. A given change in government spending will now have a greater effect on output.

e. None of the above.

4. The differences in the ratios of exports to GDP across countries are believed to be caused primarily by: Select one:

a. trade barriers.

b. each country's size.

c. geography.

d. All of the above.

e. Both B and C.

5. A reduction in the marginal propensity to import will cause: Select one:

a. the multiplier to decrease and a given change in government spending ( G) to have a larger effect on domestic output.

b. the multiplier to increase and a given change in government spending ( G) to have a larger effect on domestic output.

c. the multiplier to increase and a given change in government spending ( G) to have a smaller effect on domestic output.

d. the multiplier to decrease and a given change in government spending ( G) to have a smaller effect on domestic output.