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Q. Using a figure, show that under full employment, a temporary fiscal expansion would increase output (over-employment) but cannot increase output in the long run.
Answer: A temporarily monetary expansion will move the economy from DD1 to DD2 and output increases. A permanent financial expansion will as well shift the AA curve to the left and down. The small exchange rate appreciates that is E decreases.
Q. Discuss the role of more "transparency" in reducing the risk of financial crisis. Answer: Must discuss the Asian crisis where foreign banks lent money to Asian enter
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Q. Describe and explain the relationship between expected inflation rates in two countries and their interest rate differential according to the PPP theory. Answer: Expected p
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