Consider an Outside Shock on the Value of the Dollar

question 52

Multiple Choice

Consider an outside shock on the value of the dollar that causes it to depreciate. The Fed could defend the dollar by

• A) increasing the money supply thereby lowering the LM curve and driving the interest rate up.
• B) increasing government spending thereby raising the IS curve and driving the interest rate up.
• C) reducing the money supply thereby raising the LM curve and driving the interest rate up.
• D) increasing taxes thereby lowering the IS curve and driving the interest rate down.
• E) simultaneously increasing government spending and the money supply so that GDP climbs with a fixed interest rate.

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Definitions:

Profit-Maximizing

A strategy or process whereby a firm adjusts its production and pricing to achieve the highest possible profit.

Linear Demand Curve

A linear demand curve depicts a direct, inverse relationship between the price of a product and the quantity demanded, represented graphically as a straight line.

Inelastic Portion

A segment of the demand curve where consumers are less sensitive to price changes, implying that the quantity demanded changes only slightly in response to large changes in price.

Elastic Portion

The segment of a demand or supply curve where a change in price leads to a more than proportional change in quantity demanded or supplied.