Suppose That Foreigners Had Reduced Confidence in U

question 24

Multiple Choice

Suppose that foreigners had reduced confidence in U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be defaulted on. U.S. net exports would

• A)rise which by itself would increase aggregate demand.
• B)rise which by itself would decrease aggregate demand.
• C)fall which by itself would increase aggregate demand.
• D)fall which by itself would decrease aggregate demand.

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Definitions:

Relative Purchasing Power Parity

An economic theory that suggests the rates of inflation between two countries will affect the exchange rate between their two currencies.

Expected Inflation

An estimation of the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

Real

Pertaining to tangible or actual assets, situations, or values, as opposed to hypothetical or projected ones.

Relative Purchasing Power Parity

This economic theory suggests that the exchange rate between two currencies will adjust to reflect changes in the price levels of the two countries, maintaining the purchasing power of each currency.