Question

1). Suppose in Pakistan the macroeconomic variables i* (foreign interest rate), P (domestic aggregate price level), P* (foreign aggregate price level), Y* (foreign income level), straight pie (domestic expected inflation), T (domestic net taxes), and G (domestic government spending) are exogenously given, the interest parity condition holds, and the expectations of the future economic trends remain unchanged. In this situation, if the foreign aggregate price level, P*, declines, the IS curve

a. would not shift.

b. would shift to the left.

c. would shift to the right.

d. may shift to the right or to the left.

2). In the short run, when the long-term prospects of the economy and parameters of the aggregate preferred expenditure are given, prices are sticky, the interest parity condition holds, and the product market is in equilibrium, as the interest rate declines, equilibrium income rises because

a. exports rise.

b. imports decline.

c. investment expenditure rises.

d. all of the above.

e. none of the above.

3). If the central bank implements a conventional monetary policy of increasing the money supply to reduce the interest rate,

a. the IS curve shifts to the left and LM curve rotates downward.

b. the IS curve shifts to the right and the LM curve rotates upward.

c. the IS curve shifts to the right and the LM curve rotates downward.

d. the IS curve does not shift, while the LM curve rotates downward.

e. the IS curve shifts to the right, while the LM curve does not shift.

Answer 1

Answer 1:

Option b. If foreign price level declines, the this will increase the value of imports and reduce the value of exports which will reduce Net exports in the economy and as Net exports decreases, the IS curve of the economy wouls shift leftwards.

Answer 2:

Option d. As rate of interest in the economy decreases, the net capital outflow from the economy will occur which will lead to depreciation of currency and as durrency depreciates, exports increases and imports decreases. The fall in the rate of interest also lead to increase in investment expenditure in the economy.

Answer 3:

Option d. If Central Bank increases the level of money supply in the economy, then LM curve would shift downwards and IS curve in the economy would not shift.