Consider an Economy with Flexible Exchange Rates

question 125

Multiple Choice

Consider an economy with flexible exchange rates. If there are high levels of inflation in the economy, then the appropriate monetary policy would be to ________ the money supply, which will cause the ______ curve to shift ________.

• A) increase; the LM; left
• B) decrease; the LM; right
• C) decrease; the LM; left
• D) increase; the IS; left

Understand the concepts of expansionary and recessionary gaps within an economy.

Comprehend how self-correction mechanisms work in adjusting an economy towards its potential output.

Differentiate between passive and active approaches to economic policy.

Identify the effects of policy stances (active and passive) on real GDP and price levels in the short and long run.

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Definitions:

Hourly Wages

The rate an employee is paid for each hour worked, often regulated by labor laws.

Guaranteed Contracts

Agreements that assure certainbenefits or compensations, often seen in professional sports and executive employment contracts, regardless of performance or circumstances.

Average Fixed Cost

The fixed expenses of a firm (costs that do not change with output level) divided by the quantity of output produced.

Shutdown Decision

A short-run economic decision made by firms about whether to continue operations or shut down temporarily based on costs and revenue.