Macro · Unit 6 · Paper 3

Open Economy unit test

A test on this unit alone, marked as a percentage and a letter grade — for the test your class is actually sitting, rather than for May. Answer everything, then submit once: seeing the answer to question 3 before attempting question 4 makes the final percentage meaningless.

Paper 1 Paper 2 Paper 3

Each paper is built from this unit’s 52 terms and is the same for everyone, so a teacher can assign “Unit 6, Paper 3” and every student sits the identical test. Multiple choice is marked objectively; the written sections you mark yourself against the model answer and rubric.

Suggested time 32 min 29 points0/17 attempted

Current account

What shifts currency supply

A forex graph is for ONE currency

Who gains from appreciation

Tariff

Why the current account cannot be read alone

Exports and imports in GDP

When a current account deficit is a problem

Net exports as an AD component

Reading a forex graph

The full contractionary-policy open-economy chain

Balance of payments

Short answer 1. Define or explain: Fixed vs floating exchange rates

3 pts

Short answer 2. Define or explain: Investment income is current account

3 pts

Short answer 3. Define or explain: Capital and financial account

3 pts

Short answer 4. Define or explain: Why an appreciation weakens expansionary fiscal policy

3 pts

Free response

5 pts

SHORT QUESTION. Lizland is a small island nation whose currency is the Lizland crown (LIZ). The economy is in short-run equilibrium with a 600 million crown recessionary gap. The banking system of Lizland has AMPLE reserves, and the marginal propensity to consume is 0.75. The nations of Lizland and Andoh are trading partners with flexible exchange rates; Andoh's currency is the Andoh note (AND).

A. Policymakers are considering closing the recessionary gap in the short run. (i) Identify a specific monetary policy action the central bank (with ample reserves) would implement. (ii) The government is also considering changing its spending. Calculate the minimum change in government spending and identify the direction of change required to fully close the 600 million crown gap. Show your work.

B. Assume the government changes its spending as calculated in part A(ii). Based solely on this change, will the price level in Lizland increase, decrease, or remain the same in the short run? Explain.

C. Draw (describe) a correctly labeled graph of the foreign exchange market for the Lizland crown. Based solely on the change in the price level in part B, show the change in the international value of the crown.