Describe the easing monetary policy under flexible exchange rate.

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Answer 1

Question

Chapter 15, Problem 1RQ

To determine

Describe the easing monetary policy under flexible exchange rate.

Expert Solution & Answer

Explanation of Solution

When the government takes a contractionary monetary policy under flexible exchange rate, the policy will reduce the domestic real interest rate. Due to this reduction in interest rate, the foreigners become less attractive to invest in domestic market. Then the inflow of foreign currency to the domestic market becomes less. Also, this will reduce the demand for domestic currency in foreign market. The less demand toward the domestic currency will force the foreigners to hold less domestic assets. These will lead the domestic currency to depreciate. The depreciation makes the exchange rate value of currency to decline. Depreciation makes the foreign goods and services expensive than the domestically produced. Then the people will reduce their imports because of the insufficient cash balance in hand. The domestically produced foods become more affordable by the foreigners. Then the exports of the domestic country will increase. These will strengthen the output and employment in the country. Thus, the depreciation due to a contractionary monetary policy will automatically be corrected by the economy if the exchange rate is a flexible one.

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Answer 2

Question

Chapter 15, Problem 1RQ

To determine

Describe the easing monetary policy under flexible exchange rate.

Expert Solution & Answer

Explanation of Solution

When the government takes a contractionary monetary policy under flexible exchange rate, the policy will reduce the domestic real interest rate. Due to this reduction in interest rate, the foreigners become less attractive to invest in domestic market. Then the inflow of foreign currency to the domestic market becomes less. Also, this will reduce the demand for domestic currency in foreign market. The less demand toward the domestic currency will force the foreigners to hold less domestic assets. These will lead the domestic currency to depreciate. The depreciation makes the exchange rate value of currency to decline. Depreciation makes the foreign goods and services expensive than the domestically produced. Then the people will reduce their imports because of the insufficient cash balance in hand. The domestically produced foods become more affordable by the foreigners. Then the exports of the domestic country will increase. These will strengthen the output and employment in the country. Thus, the depreciation due to a contractionary monetary policy will automatically be corrected by the economy if the exchange rate is a flexible one.

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Answer 3

Question

Chapter 15, Problem 1RQ

To determine

Describe the easing monetary policy under flexible exchange rate.

Expert Solution & Answer

Explanation of Solution

When the government takes a contractionary monetary policy under flexible exchange rate, the policy will reduce the domestic real interest rate. Due to this reduction in interest rate, the foreigners become less attractive to invest in domestic market. Then the inflow of foreign currency to the domestic market becomes less. Also, this will reduce the demand for domestic currency in foreign market. The less demand toward the domestic currency will force the foreigners to hold less domestic assets. These will lead the domestic currency to depreciate. The depreciation makes the exchange rate value of currency to decline. Depreciation makes the foreign goods and services expensive than the domestically produced. Then the people will reduce their imports because of the insufficient cash balance in hand. The domestically produced foods become more affordable by the foreigners. Then the exports of the domestic country will increase. These will strengthen the output and employment in the country. Thus, the depreciation due to a contractionary monetary policy will automatically be corrected by the economy if the exchange rate is a flexible one.

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Answer 4

Question

Chapter 15, Problem 1RQ

To determine

Describe the easing monetary policy under flexible exchange rate.

Expert Solution & Answer

Explanation of Solution

When the government takes a contractionary monetary policy under flexible exchange rate, the policy will reduce the domestic real interest rate. Due to this reduction in interest rate, the foreigners become less attractive to invest in domestic market. Then the inflow of foreign currency to the domestic market becomes less. Also, this will reduce the demand for domestic currency in foreign market. The less demand toward the domestic currency will force the foreigners to hold less domestic assets. These will lead the domestic currency to depreciate. The depreciation makes the exchange rate value of currency to decline. Depreciation makes the foreign goods and services expensive than the domestically produced. Then the people will reduce their imports because of the insufficient cash balance in hand. The domestically produced foods become more affordable by the foreigners. Then the exports of the domestic country will increase. These will strengthen the output and employment in the country. Thus, the depreciation due to a contractionary monetary policy will automatically be corrected by the economy if the exchange rate is a flexible one.

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Answer 5

Chapter 15, Problem 1RQ

To determine

Describe the easing monetary policy under flexible exchange rate.

Expert Solution & Answer

Explanation of Solution

When the government takes a contractionary monetary policy under flexible exchange rate, the policy will reduce the domestic real interest rate. Due to this reduction in interest rate, the foreigners become less attractive to invest in domestic market. Then the inflow of foreign currency to the domestic market becomes less. Also, this will reduce the demand for domestic currency in foreign market. The less demand toward the domestic currency will force the foreigners to hold less domestic assets. These will lead the domestic currency to depreciate. The depreciation makes the exchange rate value of currency to decline. Depreciation makes the foreign goods and services expensive than the domestically produced. Then the people will reduce their imports because of the insufficient cash balance in hand. The domestically produced foods become more affordable by the foreigners. Then the exports of the domestic country will increase. These will strengthen the output and employment in the country. Thus, the depreciation due to a contractionary monetary policy will automatically be corrected by the economy if the exchange rate is a flexible one.

Answer 6

Chapter 15, Problem 1RQ

To determine

Describe the easing monetary policy under flexible exchange rate.

Expert Solution & Answer

Explanation of Solution

When the government takes a contractionary monetary policy under flexible exchange rate, the policy will reduce the domestic real interest rate. Due to this reduction in interest rate, the foreigners become less attractive to invest in domestic market. Then the inflow of foreign currency to the domestic market becomes less. Also, this will reduce the demand for domestic currency in foreign market. The less demand toward the domestic currency will force the foreigners to hold less domestic assets. These will lead the domestic currency to depreciate. The depreciation makes the exchange rate value of currency to decline. Depreciation makes the foreign goods and services expensive than the domestically produced. Then the people will reduce their imports because of the insufficient cash balance in hand. The domestically produced foods become more affordable by the foreigners. Then the exports of the domestic country will increase. These will strengthen the output and employment in the country. Thus, the depreciation due to a contractionary monetary policy will automatically be corrected by the economy if the exchange rate is a flexible one.

Answer 7

Chapter 15, Problem 1RQ

To determine

Describe the easing monetary policy under flexible exchange rate.

Answer 8

Expert Solution & Answer

Explanation of Solution

When the government takes a contractionary monetary policy under flexible exchange rate, the policy will reduce the domestic real interest rate. Due to this reduction in interest rate, the foreigners become less attractive to invest in domestic market. Then the inflow of foreign currency to the domestic market becomes less. Also, this will reduce the demand for domestic currency in foreign market. The less demand toward the domestic currency will force the foreigners to hold less domestic assets. These will lead the domestic currency to depreciate. The depreciation makes the exchange rate value of currency to decline. Depreciation makes the foreign goods and services expensive than the domestically produced. Then the people will reduce their imports because of the insufficient cash balance in hand. The domestically produced foods become more affordable by the foreigners. Then the exports of the domestic country will increase. These will strengthen the output and employment in the country. Thus, the depreciation due to a contractionary monetary policy will automatically be corrected by the economy if the exchange rate is a flexible one.