Question

Suppose policy makers want to reduce Y and keep NX constant. Which of the following policies...

Suppose policy makers want to reduce Y and keep NX constant. Which of the following policies would most likely achieve this?

A. A real exchange rate appreciation.

B. Encourage the country's trading partners to implement policies that will decrease foreign income.

C. A decrease in government spending and an increase in the real exchange rate.

D. A real exchange rate depreciation.

E. A decrease in government spending.

Suppose nominal GDP in 2011 increased by 5% (over its previous level in 2010). Given this information we know with certainty that

A real GDP increased during 2010

B both the price level and the real GDP increased during 2010

C the price level increased during 2010

D more information is needed to answer this question.

E either the price level or real GDP increased during 2010

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Answer #1

Q) If policy makers want to reduce Y and keep NX constant. Among the given options, option 'C' would allow policy makers to achieve the requird aim.

A decrease in government spending would lower both output and interest rate. Economy will witness capital outflows because of lower interest rate, investors invest in some other country where return is relatively high. As a result demand for our currency depreciates. This will boost export so to keep Net Exports(Exports -Imports) constant, real exchange rate is increased.

Q) correct option is E.

If in year 2011,Nominal GDP is increased by 5% then the reason will be either increase in the price level or increase in the real GDP in year 2010.

Nominal GDP=Real GDP*Price level

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