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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.
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Q. What are the predictions of the PPP theory with regard to the real exchange rates? Answer: The real exchange rate among two countries is a broad summary measure of
Q. Suppose Airbus is set to give the aircraft before Boeing. Which company will enter the market? Answer: Boeing will not and Airbus will produce.
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graph
Explain why the exchange rate model based on PPP is a long-run theory. Answer: PPP theory is a financial approach to the exchange rate. It is a long-run theory for the reason
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