Please use a figure to discuss whether or not a devaluation under a fixed exchange rate has the same long-run effect as a proportional increase in the money supply under a floating rate
What will be an ideal response?
A currency devaluation shifts the AA schedule outward from equilibrium point 1 to equilibrium point 2. The devaluation does not change long-run demand or supply conditions in the output market. Thus, the increase in the long-run price level will exactly offset the increase in exchange rate. Thus, a devaluation is neutral in the long run and this is the exact same scenario as for an increase in the money supply under a floating exchange rate.
You might also like to view...
The Bretton Woods exchange rate system was an example of a
A) target zone. B) managed float. C) pure gold standard. D) modified gold standard. E) floating exchange rate system.
A small open economy
A) is unable to affect the world real interest rate by its borrowing and lending decisions. B) will always be a net borrower from abroad. C) will always be a net lender abroad. D) is almost never able to borrow abroad.
Inflation accounting for the debt argues the following:
a. The change in the value of the debt when inflation occurs complicates income tax codes, and is the reason for the tax changes of 2003. b. The portion of interest payments that compensate lenders for inflation should be considered repayment of debt rather than interest expense. c. The debt represents an inflationary problem, and grows more rapidly when people fear inflation. d. The portion of the deficit dedicated to repayment of interest on the debt should not be considered part of the deficit, because it is a transfer.
If a firm is earning a positive economic profit, it means that it:
A. should invest its resources in other business opportunities. B. has an opportunity cost that is larger than what the firm is currently earning. C. operating in the long run in a perfectly competitive market. D. is using its resources in the most profitable way.