A lesson of the "impossible trinity" is that, if a country wants to have both exchange rate stability and financial market integration (i.e., free capital mobility), then it must give up protection free trade deficit spending monetary independence

A lesson of the "impossible trinity" is that, if a country wants to have both exchange rate stability and financial market integration (i.e., free capital mobility), then it must give up protection free trade deficit spending monetary independence

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter6: Managing In The Global Economy

Section: Chapter Questions

Problem 6E

See similar textbooks

Related questions

Q: Suggest an appropriate policy in order to increase national income for fixed and flexible exchange…

A: Mundell-Fleming model assume fixed prices and small economy.

Q: “According to the logic of the J-curve analysis, a country that revalues its currency should have an…

A: The J-curve describes the way that a country’s balance of trade initially worsens following a…

Q: The monetary system for conducting international trade is usually described as a system of fixed…

A: The exchange rate is the rate at which the domestic currency can be expressed into foreign currency.…

Q: With the help of diagrams, explain the effects of expansionary and contractionary monetary and…

A: Monetary policy The policy of the central bank or monetary authority is called is referred to as a…

Q: Identify whether each attribute in the following table is an advantage or disadvantage of sharing a…

A: Uniform pricing: Advantage

Q: In the determination of currency prices and exchange rates, the market forces of supply and demand…

A: In the determination process of currency prices and exchange rates, the market forces play a…

Q: Under the Bretton Woods system of exchange rates, the official value of the U.S. dollar was fixed to…

A: "Exchange rate refers to the value of one currency in terms of another." In other words, the…

Q: If a country's government chooses to have a cleanly floating exchange rate for its currency, then…

A: Under floating exchange rate, exchange rate is determined through market forces of demand and supply…

Q: If the monetary authority contracts money supply and the fiscal authority raises taxes, then in a…

A: When the central bank contracts the money supply with raising the interest rates, it makes the…

Q: Which of the following is a big disadvantage of fixed exchange rate a. Uncertainity b. Susceptible…

A: Fixed Exchange Rate:- A fixed exchange rate system is one implemented by a nation's central bank or…

Q: Which of the following is NOT a component of the so-called foreign exchange “policy trilemma in open…

A: Policy trilemma is also called impossible trinity which says the economy cannot have three…

Q: According to the prediction of covered interest parity, if the U.S. interest rate is 4% per year,…

A: Covered interest parity: F1 = S0 * [1 + (RUS - RUK)] Where F1 is the forward exchange rate. It is…

Q: Discuss the strong and weak points of the flexible exchange rate system? What are the strong and…

A: The exchange rate is the rate that is used to exchange one national currency for another.

Q: Countries continue to join the European Union under the agreement of sharing a common currency, the…

A: Note:- Since we can only answer one question at a time and as the exact one is not specified, we'll…

Q: According to the Impossible Trinity, if a country decides to make its currency freely floating, what…

A: The Impossible trinity is an economic theory, which suggests that countries can choose from three…

Q: Most exchange rates are free-floating. True or False

A: A free floating exchange rate is solely determined by market forces of demand and supply of foreign…

Q: An important problem with the gold standard was that one country could easily manipulate the system…

A: The gold standard operated in the period between 1870-1914 and under the gold standard, the main…

Q: Suppose that a country with pegged exchange rate has reserves of $8 billion and is running a deficit…

A: Given Foreign exchange reserves = 8 Billion $ Current account deficit = 1 Billion per month…

Q: The exchange rate effect implies that a currency depreciation: a. increases the quantity of goods…

A: The exchange rate is the price of the domestic currency in terms of the currency of the foreign…

Q: In explicit detail, describe the ‘twin deficit problem’, and discuss whether expansionary fiscal or…

A: (Q) In explicit detail, describe the ‘twin deficit problem’, and discuss whether expansionary fiscal…

Q: Are fixed or floating exchange rates better for the eurozone countries?

A: To what extent did the euro's creation alter currency policy in the Eurozone countries? The answer…

Q: Critically evaluate the importance of the Marshall- Learner condition in the stability of the…

A: The foreign exchange market is the over-the-counter market that determines the exchange rate of…

Q: ch one iS king or (a) Fixed exchange rate (b) Flexible exchange rate c) Both (a) and (b) d) None of…

A: According to the given question the king of the exchange rate is the OPTION(C) IS THE CORRECT ANSWER…

Q: If President Erdogan wants to keep interest rates low, according to the Trilemma components, this…

A: Low interest rate increase the money demand in the economy and this low interest target is need to…

Q: What is the logic behind the theory of purchasing-power parity? What does purchasing-power parity…

A: The purchasing power parity theory suggest that the exchange rate of the currencies is equal to the…

Q: Explain how exchange rates worked under the gold standard and Bretton Woods.

A: An exchange rate is the value of currency of a nation being measured in terms of the currency of…

Q: How is it necessary for a nation with a fixed exchange rate and open financial markets to renounce…

A: The rate about which one currency will be swapped for another is known as the exchange rate. The…

Q: Under a flexible exchange rate system, a decrease in the value of a domestic currency in terms of…

A: Decrease in value of domestic currency in terms of foreign currency is referred to as currency…

Q: flexible exchange rate because aggregate economic policies will be more effective. it is less costly…

A: a) A fixed exchange rate is preferable to a flexible exchange rate because aggregate economic…

Q: Which is suitable exchange rate regime for desirable international business?

A: Exchange rate shows the value of one currency in terms of other currency. The two exchange rate…

Q: If a company believed that a nation was preparing to devalue its currency, the company should reduce…

A: Meaning of Macroeconomics: The term macroeconomics refers to the situation of economic and…

Question

A lesson of the "impossible trinity" is that, if a country wants to have both exchange rate stability
and financial market integration (i.e., free capital mobility), then it must give up
protection
free trade
deficit spending
monetary independence

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1 (Concepts)

VIEW

Step 2 (Answer)

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

If investors believe that the country's exchange rate peg is not credible, the risk premium on that country's local currency denominated assets will probably a) increase b) decrease c) stay the same d) we do not have enough information
Explain why, when assuming imperfect competition with non-homogenous goods and unemployment, the monetarypolicy is efficient in the case of flexible exchange rate and fully inefficient when exchange rates are fixed. Give proper explanation.thank you
Explain why with perfect capital mobility, monetary policy is completely ineffective when exchange rates are fixed. (Explain with graph)
Again, suppose you wanted to make domestic industries more competitive but did not want to alter aggregate income. Assuming now a fixed exchange rate, what policy or combination of policies should you pursue, according to the Mundell–Fleming model? Select all that apply Revaluation Expansionary monetary Contractionary fiscal Devaluation Contractionary monetary Expansionary fiscal
What are the advantages and disadvantages of currencyboards and dollarization over a monetary policy thatuses only an exchange-rate target?
Under a fixed exchange rate regime, how does increase in GDP effect the domestic money market equilibrium in the long run (explain in words and graphically)?
Compare and contrast a fi xed exchange rate system with a floating exchange rate system, with reference to factors including the degree of certainty for stakeholders, ease of adjustment, the role of international reserves in the form of foreign currencies and fl exibility offered to policy makers.
For the above condition to hold, perfe mobility must be assumed and the domestic interest rate must be the foreign interest rate. equal to higher than lower than 2. When a country pegs its exchange rate, an increase in government spending A. the foreign rate. B. the interest rate. C. output. D. all of the above (G) increases: all of the above 3. In an economy with fixed exchange rates that is performing near full output, ______could become an issue that monetary policy would otherwise be able to address in an economy with flexible exchange rates by _____
If a country’s par exchange rate was undervalued during the Bretton Woods fixed exchange rate regime,what kind of intervention would that country’s centralbank be forced to undertake, and what effect wouldthe intervention have on the country’s internationalreserves and money supply?
Reducing Economic Exposure Colorado, Inc., is a U.S.-based MNC that obtains 10 percent of its supplies from European manufacturers. Sixty percent of its revenues are due to exports to Europe, where its product is invoiced in euros. Explain how Colorado can attempt to reduce its economic exposure to exchange rate fluctuations in the euro.
What are the key advantages of exchange-rate targetingas a monetary policy strategy?
Suppose the foreign country is experiencing a recession that reduces foreign output, Y*. To stimulate the economy, foreign central bank pursuits an expansionary monetary policy by reducing foreign interest rate, i*. In an IS-LM-UIP diagram, show the effect of the decrease in foreign output, Y*, and the decrease in the foreign interest rate, i*, on domestic output (Y) and the exchange rate (E), when the domestic central bank matches the decrease in the foreign interest rate with an equal decrease in the domestic interest rate.