some questions

[tanudas]

1. Which one of the following is NOT likely to lead to cost push inflation?

A An increase in trade union powers.
B An appreciation of the domestic currency’s exchange rate.
C An increased budget deficit which causes interest rates to rise.
D An increase in the profit margins applied by firms.


2. If a country experiences high domestic inflation compared to its trading partners with
a fixed exchange rate then the effect of the inflation will be to:

A decrease the country’s imports.
B increase the country’s exports.
C shift the country’s currency supply curve in the foreign exchange market to the
right requiring central bank purchases of the domestic currency to maintain the
fixed exchange rate.
D shift the demand curve for the country’s foreign exchange to the right
requiring central bank purchases of the domestic currency to maintain the
fixed exchange rate.


3. Consider an economy where the demand for real money balances is interest elastic
and the demand for investment is interest inelastic. A change in the money supply
will result in a relatively:
A small change in the rate of interest and the level of investment.
B large change in the rate of interest and the level of investment.
C small change in the rate of interest and a relatively large change in the level of
investment.
D large change in the rate of interest and a relatively small change in the level of
investment.

[Anviksha]

3.. It would be A..
If money supply increases, it is given that money demand is elastic. A small decrease in rate of interest will suffice to get money market back in equilibrium.
Now it is given that investment is inelastic,only  a very large decrease in interest rate can lead to large investment increase.
Here , there is only small decrease in rate of interest and thus it will lead to small increase in investment.

[Anviksha]

2.. It would be C..
If home prices are increasing relative to foriegn prices .
It means that the real exchange rate is decreasing.
Hence, decreasing home's competitiveness and decrease in net exports.
This leads to a leftward shift of IS curve in the Mundel Fleming Model. At i<i*. There is a pressure on home currency to depreciate.
It is given that it is fixed exchange rate regime. Therefore, the central govt has to intervene and buy domestic currency which will lead to an increase in supply of domestic currency in forex market leading to rightward shift of its supply curve ..

[RS]

1. It can be c. Because inflation due to increase in budget deficit is demand pull inflation

[RS]

Sorry first is b for sure. Appreciation doesn't cause inflation.