Derive graphically the aggregate demand curve under fixed exchange rates and explain the transmission mechanism from a price change to an output change
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Derive graphically the aggregate
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- Economic exposure can be managed by balancing the sensitivity of revenue and expenses to exchange rate fluctuations. Discuss some of the ways a CEO can limit economic exposure. Provide an example of one such technique.The following options are all important reasons to study the theory of PPP EXCEPT Group of answer choices a. It provides a baseline forecast of future exchange rates that is usually considered whenever it is necessary to forecast future cash flows in different currencies. b Deviations from PPP significantly affect the profitability of firms. c. It is particularly useful in assessing cost-of-living differences across countries. d The deviations from the theory are very small when it comes to the determination of exchange rates.Construct a model that shows how – in the longer run – money supply and demand as well as the dollar return on foreign assets determine the exchange rate.
- Given perfect capital mobility and aggregate demand expressed as shown in the image, Solve for the exchange rate e as a function of income. Determine the equilibrium exchange rate as a function of exogenous variables.Would it be accurate to think of a fixed exchange rate as a simultaneous price ceiling and price floor?Label the following statements as true, false or uncertain, and provide explanation for your answer. (A). Under floating exchange rates it is easier to maintain internal balance than it would be if the exchange rate were fixed but more difficult to achieve external balance. (B). Because developed countries issue debt denominated in foreign currencies, they are able to reduce the burden of that debt by devaluing their currencies. (C). Similarity of economic structure, and composition of output, tends to reduce the economic stability loss from joining a currency union. (D). A current account deficit (CA < 0) implies two things: absorption is more than national income (A > Y) and national saving is less than investment spending (S < I).
- The Big Mac index uses prices of a common item to predict long-run changes in exchange rates. True FalseWithin the context of the Mundell-Fleming Model under a fixed exchange rate system, describe how the economy would respond to expansionary fiscal policy a.The IS* curve would shift outward to the right putting upward pressure on the exchange rate. The monetary authority would intervene by engaging in expansionary monetary policy like increasing government sending in order to increase national income b.The IS* curve would shift outward to the right putting upward pressure on the exchange rate. The monetary authority would intervene by engaging expansionary monetary policy like open market operation to increase national income. c.There will be no intervention since the exchange rate is already fixed and cannot be changed. d.The IS* curve would shift outward to the right putting upward pressure on the exchange rate. The monetary authority would intervene by selling domestic currency in the foreign exchange market.Consider Alpha, a country that is open to trade in goods and services with the rest of the world, where prices are fixed and in which only the goods market exists. In Alpha, the Marshall-Lerner condition doesn't hold — more precisely, net exports depend positively on the realexchange rate. Initially, the country is in goods market equilibrium, and trade is balanced. Having discussed which of the following three Figures provides a correct representation of the initial equilibrium in Alpha, describe the effects of a real appreciation. In particular, discuss if and how the various curves represented in the graph you have chosen will be affected, and explain the effects of the appreciation of the exchange rate on the equilibrium values of income, consumption, investment and net exports.
- There are a number of factors that can affect exchange rates. List and explain at least three.Which of the following is a characteristic of a fixed exchange rate system? A. Exchange rates fluctuate freely in response to market forces B. Exchange rates are determined solely by government intervention C. Exchange rates are fixed and do not change D. Exchange rates are determined by supply and demand in foreign exchange marketsThe Figure below shows the trade in financial services between Britain and the EU. SB denotes the supply of financial services by British financial companies, and DB shows the domestic demand for financial services by British consumers. Under free trade British financial houses can trade at the world market PW. As a result of “hard Brexit”, British financial houses are banned from doing business in the EU and are confined to the domestic market only (ignore trade with third countries) Identify British production, consumption, trade volume and total social welfare (consumption and production surpluses) under free trade. Identify British production, consumption, trade volume and total social welfare (consumption and production surpluses) after trade is banned.
