Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 20, Problem 8E
To determine
Currency crises and demand for dollars.
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Consider the relationship among exchange-rate changes, aggregate demand, and monetary policy. Assume we begin in a situation with real GDP equal to Y∗.Y*.
Suppose the world price for raw materials rises because of growing demand for these products. Given that Canada is a net exporter of raw materials, what is the likely effect on Canadian aggregate demand? Show this in an AD/AS diagram (assuming no change in the exchange rate).
Suppose instead that there is an increase in the demand by foreigners for Canadian financial assets such as government bonds. What is the direct effect on Canadian aggregate demand? Show this in an AD/AS diagram (assuming again no change in the exchange rate).
Both of the shocks described above are likely to cause an appreciation of the Canadian dollar on foreign-exchange markets. As the Canadian dollar appreciates, what are the effects on aggregate demand in part (a) and in part (b)? Show these “secondary” effects in your diagram and explain.
Given your…
Consider the aggregate demand function,
D(EPF/PH, Y-T, I, G) = C(Y-T) + I + G +
CA(EPF/PH, Y-T).
When Foreign price fell, how would the
consumption, the current account and the
aggregate demand change:
Increase, Decrease or No change?
Consumption:
Current account:
Aggregate demand:
Explain how changes in exchange rates impact the economy through the aggregate demand- aggregate supply (AD/AS) model. Explain how fluctuations in exchange rates can influence loans and banks.
Chapter 20 Solutions
Macroeconomics (Fourth Edition)
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