that in the long-run the price level is assumed perfectly flexible

that under fixed exchange rates, the money supply is exogenous

.that the marginal propensity to import is assumed to be a constant fraction of GDP

.the principle of long-run PPP

(A) positive domestic inflation; (B) reduces domestic and foreign demand

(A) positive domestic inflation; (B) increases the domestic demand

(A) rising domestic inflation; (B) reduces domestic and foreign demand

(A) rising domestic inflation; (B) increases the domestic demand

Otherwise the real exchange rate would change

The Principle of Purchasing Power Parity would be violated

This is inconsistent with Okun’s Law

Each must equal the domestic rate of inflation so that AS does not shift and the relative competitiveness of domestic goods does not change

All non-zero output gaps imply core and actual inflation differ.

The fiscal expansionary policy must eventually be reversed for fiscal sustainability

The domestic rate of inflation cannot deviate from the foreign rate of inflation

The new long-run equilibrium will have higher inflation and higher unemployment (i.e. stagflation)

(A) an increase in the exchange rate; (B) decline in net exports

(A) a decrease in the exchange rate; (B) an increase in net exports

(A) contractionary monetary policy; (B) real exchange rate appreciation

(A) expansionary monetary policy; (B) real exchange rate depreciation