Note that some of the statements could be viewed as either true or false depending on your assumptions about the economy. Therefore, your grade is based solely on your explanations. Each question should take you no longer than 10 minutes to answer.
All questions have equal weight.
In a small open economy, the real interest rate adjusts to insure that the net foreign borrowing is held constant. Trade deficits are a bad thing since they reflect the inability of domestic firms to compete in the global marketplace. In the Classical model, an increase in the money supply lowers the real interest rate. When velocity is constant, the Quantity Theory predicts that foreign exchange rates do not depend on monetary policy. The Keynesian theory of the short run predicts that a decrease in taxes will cause output to decrease.