In a Model with Perfect Capital Mobility and Flexible Exchange

question 15

Multiple Choice

In a model with perfect capital mobility and flexible exchange rates, an increase in government purchases will

• A)increase net exports but decrease private domestic investment
• B)be totally crowded by a decrease in private domestic investment of the same magnitude
• C)crowd out net exports due to an exchange rate appreciation
• D)increase net exports due to a depreciation of the exchange rate
• E)increase consumption and net exports but decrease private domestic saving

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Definitions:

Average Costs

The total cost of production divided by the quantity produced, often used to evaluate production efficiency.

Fixed Costs

Costs that remain constant regardless of the level of production or sales activities, such as rent, salaries, and insurance premiums.

Marginal Costs

Marginal costs represent the change in total production cost that arises when the quantity produced is incremented by one unit, essentially the cost of producing one additional unit of a good.

Marginal Productivity

Marginal productivity is the additional output that is produced by using one more unit of a certain input, assuming that all other inputs remain constant.