Question 5

In 1997-1998, East Asian countries experienced a major financial crisis, which reduced their incomes significantly. This led to a major decline in the global oil demand, which caused a sharp drop in oil prices in international markets in 1997-1998. This development acted as a favorable supply shock for the European economy. The oil price decline also induced a favorable demand shock in Europe, though with a much smaller magnitude than the supply shock. If before 1997 the European economy had been in long-run equilibrium, then as a result of these shocks in 1997-1998, Europe must have experienced

a. a decrease in GDP growth rate and a rise in the inflation rate.

b. an increase in GDP growth rate and a rise in the inflation rate.

c. a decrease in GDP growth rate and a decline in the inflation rate.

d. no change in GDP growth rate and a decline in the inflation rate.

e. an increase in GDP growth rate and a decline in the inflation rate.

f. an increase in GDP growth rate and no change in the inflation rate.

QUESTION 6

In Question 5 above, if the European central banks wanted to keep inflation the same as it had been before the 1997-1998 shock, they should have

a.increased their money supplies at faster rates than they did before 1997.

b.increased their money supplies at slower rates than they did before 1997.

c.increased their money supplies at the same rates as they did before 1997.

d.asked European governments to reduce their fiscal expenditures compared to the situation before 1997.