Pearson eText Macroeconomics -- Access Card
7th Edition
ISBN: 9780136850014
Author: Hubbard, Glenn, O'Brien, Anthony
Publisher: PEARSON
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Chapter 19, Problem 19.1.5PA
To determine
Difficulty in pursuing the expansionary
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Explain why a country with fixed exchange rate and open financial markets has to give up its monetary policy independence?
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The incompatible trinity, also known as the trilemma, states that it is impossible to have all three of the following at the same time: a fixed foreign exchange rate, free capital movement (absence of capital controls), and an independent monetary policy. In this case, Brazil is sacrificing an independent monetary policy. This is because it is keeping its exchange rate fixed and allowing free capital movement, but it is not able to independently set its interest rate.
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Step 2
The real exchange rate is the purchasing power of a currency relative to another at current exchange rates and prices. It is the ratio of the price of a specific good in one country to the price of the same good in another country, expressed in the same currency. In this case, we are using the price of a Big Mac in China and the US to calculate the real exchange rate.
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Step 3
First, we need to convert the price of a Big Mac in China to US dollars using the nominal exchange rate.…
Chapter 19 Solutions
Pearson eText Macroeconomics -- Access Card
Ch. 19.A - Prob. 1RQCh. 19.A - Prob. 2RQCh. 19.A - Prob. 3RQCh. 19.A - Prob. 4RQCh. 19.A - Prob. 5RQCh. 19.A - Prob. 6RQCh. 19.A - Prob. 7PACh. 19.A - Prob. 8PACh. 19.A - Prob. 9PACh. 19.A - Prob. 10PA
Ch. 19.A - Prob. 11PACh. 19.A - Prob. 12PACh. 19.A - Prob. 13PACh. 19.A - Prob. 14PACh. 19.A - Prob. 15PACh. 19.A - Prob. 1RDECh. 19 - Prob. 19.1.1RQCh. 19 - Prob. 19.1.2RQCh. 19 - Prob. 19.1.3PACh. 19 - Prob. 19.1.4PACh. 19 - Prob. 19.1.5PACh. 19 - Prob. 19.1.6PACh. 19 - Prob. 19.2.1RQCh. 19 - Prob. 19.2.2RQCh. 19 - Prob. 19.2.3RQCh. 19 - Prob. 19.2.4RQCh. 19 - Prob. 19.2.5PACh. 19 - Prob. 19.2.6PACh. 19 - Prob. 19.2.7PACh. 19 - Prob. 19.2.8PACh. 19 - Prob. 19.2.9PACh. 19 - Prob. 19.2.10PACh. 19 - Prob. 19.2.11PACh. 19 - Prob. 19.2.12PACh. 19 - Prob. 19.2.13PACh. 19 - Prob. 19.2.14PACh. 19 - Prob. 19.2.15PACh. 19 - Prob. 19.2.16PACh. 19 - Prob. 19.2.17PACh. 19 - Prob. 19.2.18PACh. 19 - Prob. 19.2.19PACh. 19 - Prob. 19.2.20PACh. 19 - Prob. 19.3.1RQCh. 19 - Prob. 19.3.2RQCh. 19 - Prob. 19.3.3PACh. 19 - Prob. 19.3.4PACh. 19 - Prob. 19.3.5PACh. 19 - Prob. 19.2RDE
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- Can you think of a way that Chinese monetary policy might impact some other part of the world economy?arrow_forwardDerive the purchasing power parity using quantity theory of money. Explain and graphically show what determines the supply and demand of a currency.(Note: Give only necessary details. Background info. isn't required. Please try to meet the deadline. Thanks!)arrow_forwardam. 113.arrow_forward
- How is it necessary for a nation with a fixed exchange rate and open financial markets to renounce its independence in terms of monetary policy?arrow_forwardIn the overshooting model, an increase in the money supply leads to higher inflation and currency depreciation. Can you think of a situation where higher inflation could lead to currency appreciation?arrow_forwardVisit one of the many websites that lists all of the current exchange rates between different currencies around the world. Try a financial newspaper’s site such as ft.com (follow the links to “Market Data,” and then “Currencies”), or try websites devoted to foreign exchange market data such as oanda.com or xe.com (dig down; don’t just look at the major currency tables). According to these lists, how many distinct currencies exist around the world today? Are some currencies used in more than one country?arrow_forward
- According to the simple monetary model, money is growing at 5% in the United States and 6% in the United Kingdom, while real GDP is rising at 3% in the United States and at 5% in the United Kingdom. What will this do to the exchange rate?arrow_forwardDevaluation can help boost country’s exports, slash trade deficit by shrinking imports, encourages import substitution and brings competitiveness in its manufacturing processes. During last three years, Pakistan devalued its currency by almost 40%. Did Pakistan achieve aforesaid objectives of PKR devaluation; Explain briefly?arrow_forwardYears ago when banks generated bank notes on their deposits that citizens used as currency, they were often backed by hard assets, including gold that depositors placed with the bank. How is that any different from when the US was on the "gold standard?"arrow_forward
- Using the foreign exchange market (CAD/EURO), suppose price level in Canada is higher compared to the rest of the world and, at the same time, Canada becomes a more attractive tourist destination for Europeans, show and explain how the foreign exchange rate and the quantity of foreign currency will change.arrow_forwardThe NEWS magazine uses the price of a Mercedes Benz A-class to determine whether a currency is undervalued or overvalued. In July 2019, the price of Mercedes Benz was $55 thousand in New York, 390 thousand yuan in Beijing, and 66.5 thousand Swiss francs in Geneva. The exchange rates were 6.79 yuan per U.S. dollar and 0.96 Swiss francs per U.S. dollar. a. Does the purchasing power parity hold? Was yuan undervalued or overvalued relative USdollar? Explain your answer and show the calculation. b. Do you think the price of a representativeness car, Mercedes Benz in different countriesprovides a valid test of purchasing power parity?arrow_forwardIf the price of one gallon of gasoline goes down from $4.07 per gallon to $3.99 per gallon, how will that affect the value of the US dollar? Why does it affect the value of the dollar?arrow_forward
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