Suppose that there are only two countries in the world: Localia (which is us), that uses the "Localios" (LCL) as its currency, and Nearovia (our trading partner), which uses “Nearos" (NER) as its currency. For questions 1-3, assume that this exchange rate between the NER and the LCL is flexible. Now consider the Supply & Demand market for domestic Localios. Suppose also that the Central Bank cuts interest rates at home in Localia. 1. What would we expect to happen to the exchange rate for LCL as a result of this rate cut? Explain using the Supply and Demand Figure for LCL and explain why any movements of any of the curves occur. 2. Would this create a recessionary gap, inflationary gap, or neither in Localia? Explain using vour AD-AS Figure for Localia

Suppose that there are only two countries in the world: Localia (which is us), that uses the "Localios" (LCL) as its currency, and Nearovia (our trading partner), which uses “Nearos" (NER) as its currency. For questions 1-3, assume that this exchange rate between the NER and the LCL is flexible. Now consider the Supply & Demand market for domestic Localios. Suppose also that the Central Bank cuts interest rates at home in Localia. 1. What would we expect to happen to the exchange rate for LCL as a result of this rate cut? Explain using the Supply and Demand Figure for LCL and explain why any movements of any of the curves occur. 2. Would this create a recessionary gap, inflationary gap, or neither in Localia? Explain using vour AD-AS Figure for Localia

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter29: International Finance

Section: Chapter Questions

Problem 8P

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