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For each of the following questions, state whether the statement is true or false
For each of the following questions, state whether the statement is true or false. (Hint: Look at ALL THE WORDING in the sentence, some words change the correctness of the statement).
According to the Purchasing Power Parity (PPP) theory of nominal exchange rates, countries with relatively high rates of inflation will see their nominal exchange rates depreciate over time.
True or False
A central goal of Federal Reserve policy is to drive inflation to 0%, because such a policy entails numerous benefits and no costs for the U.S. economy.
True or False
In the Keynesian model, whenever planned aggregate expenditure (PAE) is greater than current output (Y), there is a recessionary gap, and the short-run equilibrium can only be restored through fiscal policy.
True or False
Monetary policy can be autonomous under fixed exchange rate regimes.
True or False
When government deficits decline, and there is less need to sell government bonds as a result, the economy would generally experience less crowding out of private investment.
True or False
Expert Solution
1) The nominal exchange rate is given as real exchange rate plus the difference between the foreign and domestic inflation rate. Since domestic inflation rate has increased, the difference between foreign and domestic inflation rate will decline. This will lead to a decline in the nominal exchange rate, causing an appreciation in domestic nominal exchange rates. Therefore, the statement is false.
2) Pulling down inflation rate to zero will cause stagnation in the economy and curb economic growth. This is not the motive of the US government. Thus, the statement is false.
3) In the Keynesian model, any difference beyween the planned expenditure and the output can be fixed only through fiscal policy. This statement is true.
4) In fixed exchange rate system, monetary policy has be streamlined and monitored in a way such that the exchange rate remains fixed. Thus the statement is false.
5) The statement that lower fiscal deficits lead to lesser crowding out is true.
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