Page 492 - Krugmans Economics for AP Text Book_Neat

Exchange rate
(Canadian dollars
per U.S. dollar)

Supply of
U.S. dollars

XR 2 E 2
XR 1 E 1

D 2
D 1

Quantity of U.S. dollars
✔ What will happen to the U.S. dollar relative to the Canadian dollar?
The U.S. dollar will appreciate.
✔ How will the Federal Reserve’s contractionary monetary policy affect the real interest rate in the
United States? Explain.
There will be no effect on the real interest rate in the long run because, due to the neu-
trality of money, changes in the money supply do not affect real values in the long run.

Module 45 AP Review

Solutions appear at the back of the book.

Check Your Understanding
1. The economy is operating in long-run macroeconomic c. What will happen to the aggregate price level and real GDP
equilibrium. in the long run? Explain.
a. Illustrate this situation using a correctly labeled aggregate d. Suppose the government is experiencing a persistent budget
demand-aggregate supply graph. deficit. How will the decrease in government spending affect
b. Use your graph to show the short-run effect on real GDP that deficit? Use a correctly labeled graph of the loanable
and the aggregate price level if there is a decrease in funds market to show the effect of a decrease in government
government spending. spending on the interest rate.

Tackle the Test: Multiple-Choice Questions

Questions 1–5 refer to the following scenario: 1. Which of the following occurs as a result of the recession in
Mexico?
The United States and Mexico are trading partners. Suppose a
I. Output in Mexico decreases.
flu outbreak significantly decreases U.S. tourism in Mexico and
II. Aggregate demand in the United States decreases.
causes the Mexican economy to enter a recession. Assume that
III. Output in the United States decreases.
the money that would have been spent by U.S. tourists in
a. I only
Mexico is, instead, not spent at all.
b. II only
c. III only
d. I and II only
e. I, II, and III

450 section 8 The Open Economy: Inter national Trade and Finance