Chapter 1 Hard Questions Flashcards
A company manufactures goods in Esland for sale to consumers in Woostland. Currently, the economy of Esland is booming and imports are rising rapidly. Woostland is experiencing an economic recession, and its imports are declining. How will the Esland currency, $E, react with respect to the Woostland currency, $W?
The E will decline in respect to the W. Seems couner iintuitive but think about it:
The scenario is basically saying that E is in a boom economy, while W is in a recession. Thus, consumers in E tend to have spendable cash.
Companies in economy W are in a recession. This means that goods and services will start becoming discounted due to the bad economy - in other words cheaper.
Because they are cheaper, demand for W’s products in E will be higer! Now, exchange rate holders will start bidding up prices because the demand for W’s currrency is going up relative to the E’s currency.
In other words,E’s currency will decline with respect to W’s.
3.
Freely fluctuating exchange rates perform which of the following functions?
They automatically correct a lack of equilibirum in a balance of payments
If NAIRU is 5%, the actual rate of unemployment is 9%, real GDP is below that at the peak of the previous expansion, and the rate of real economic growth is 3%:
The economoy is experiencing a recovery.
It’s in a recovery because theres 3% growth - some sort of inflation insttead of recession. But Unemployment is still so much hgher than NAIRU it must mean we’re going through a recovery from a priorrecessioj. Soon that real rate of economic growth is gonna start getting higher and higher!
wrong answer explanations:
Unemployment is far above NAIRU, so ACtual GDP is liekly LESS than potential GDP. Thus, it’s also not in a “full expansion”. (these were the incorrect answers)
Full employment:
implies that the cyclical unemployment is 0.
From GOOGLE:
Full employment, in macroeconomics, is the level of employment rates where there is no cyclical or deficient-demand unemployment. It is defined by the majority of mainstream economists as being an acceptable level of unemployment somewhere above 0%.
From INVESTOPEDIA:
A situation in which all available labor resources are being used in the most economically efficient way. Full employment embodies the highest amount of skilled and unskilled labor that could be employed within an economy at any given time. The remaining unemployment is frictional.
From you:
Remember from high school:
No matter what there will always be Natural and Cyclical unemployment (thus the answer).
Natural unemployment means frictional and structural. Theres always frictional unemployment (bc of new people enterring the workforce, people transferring, and people quitting tof ind better jobs).
