Suppose the Economy Is in Long-Run Equilibrium

question 121

Multiple Choice

Suppose the economy is in long-run equilibrium.Concerns about pollution cause the government to significantly restrict the production of electricity.At the same time,the value of the dollar falls.What would we expect to happen in the short run?

• A) Real GDP will rise,and the price level might rise,fall,or stay the same.
• B) Real GDP will fall,and the price level might rise,fall,or stay the same.
• C) The price level will rise,and real GDP might rise,fall,or stay the same.
• D) The price level will fall,and real GDP might rise,fall,or stay the same.

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Definitions:

Interest Rate Parity

An economic theory stating that the difference in interest rates between two countries is equal to the expected change in exchange rates between their currencies.

Unbiased Forward Rates

Financial theory suggesting that forward exchange rates should be an unbiased predictor of future spot exchange rates.

Covered Interest Arbitrage

An investment strategy that involves exploiting the interest rate differential between two countries while using forward contracts to hedge against currency risk.

Eurobonds

International bonds issued in a currency not native to the country where it is issued, allowing companies to raise capital in a foreign currency.