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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406

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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406
Textbook Problem

Country 1 produces good X, and country 2 produces good Y. People in both countries begin to demand more of good X and less of good Y. Assume that there is no labor mobility between the two countries and that a flexible exchange rate system exists. What will happen to the unemployment rate in country 2? Explain.

To determine

Change in unemployment when there is no labor mobility between two countries under flexible exchange rate system.

Explanation

Under flexible exchange rate, change in the value of country 1’s currency depends on currency of country 2. Suppose, people in both countries demand for the goods of country 1. When country 2 buys good of country 1, they have to exchange the currency with country 1. As demand for goods increases, demand for currency also increases. This will increase the supply of country 2’s currency. Thus, it results in appreciation of country 1’s currency and depreciation of country 2’s currency...

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