Author Question: In the short run, with prices fixed, how would an increase in government spending affect the DD-AA ... (Read 67 times)

fahad · **on:** Jun 30, 2018

In the short run, with prices fixed, how would an increase in government spending affect the DD-AA equilibrium?

A) It will increase output and appreciate the currency.
B) It will increase output and depreciate the currency.
C) It will decrease output and appreciate the currency.
D) It will decrease output and depreciate the currency.
E) It will increase output and have no effect on the currency.

Question 2

Refer to above figure. Would you expect to find that the real wages become equalized in both countries? Explain the reason for any differences you note.

What will be an ideal response?

ju · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

A

Answer to Question 2

We would expect that one single relative wage will be established for both countries. This happens because the two countries do not differ in relative factor availability by much, and hence a zone of overlap exists which allows for this result.