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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
BuyFind

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

Solutions

Chapter
Section
Chapter 19, Problem 4CQQ
Textbook Problem
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The nation of Ectenia has long banned the export of its highly prized puka shells. A newly elected president, however, removes the export ban. This change in policy will cause the nation’s currency to ________, making the goods Ectenia imports __________ expensive.

a. appreciate, less

b. appreciate, more

c. depreciate, less

d. depreciate, more

Expert Solution
To determine
The impact of removing the export ban on exchange rate.

Explanation of Solution

The interest rate determined at the supply and demand intersection in the lonable fund market is known as the real interest rate and that determined rate in the currency exchange market is known as the real exchange rate.

Option (a):

The goods of the economy are highly priced and the export of the commodity was banned until the new government. Thus, the demand for the good is higher in the foreign market. When the export ban is removed, it will increase the foreign demand for the commodity. As a result, the exports of the economy will increase, which will increase the demand for the domestic currency in the currency exchange market. Therefore, the domestic currency will appreciate and it will make the foreign imports of the economy to become cheaper because less domestic currency can be paid for imports. Thus, option 'a' is correct.

Option (b):

The goods of the economy are highly priced and the export of the commodity was banned until the new government. Thus, the demand for the good is higher in the foreign market. When the export ban is removed, it will increase the foreign demand for the commodity. As a result, the exports of the economy will increase, which will increase the demand for the domestic currency in the currency exchange market. Therefore, the domestic currency will appreciate and it will make the foreign imports of the economy to become cheaper because less domestic currency can be for imports...

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