"Under floating rates, the economy is more vulnerable to shocks coming from the domestic money market." Discuss
What will be an ideal response?
The statement is true. Under floating rates, a rise in real domestic money demand causes income to fall and to an appreciation of the domestic currency. If the rise in real domestic money supply is permanent, it will lead eventually to a fall in the home price level.
Under a fixed exchange rate, the change in real money demand does not affect the economy at all. To prevent the home currency from appreciating, the central bank buys foreign reserves with domestic money until the real money supply rises by an amount equal to the rise in real money demand. This intervention has the effect of preventing any change in output or the price level.
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The data in the table above give two points on the demand curve for pizza. Using the midpoint method, when the price of a pizza falls from $10 to $9, what is the price elasticity of demand?
A) 0.5 B) 0.6 C) 0.9 D) 2.1 E) 8.6
Which of the following is not a resource?
a. Land. b. Labor. c. Money. d. Capital.
Assume that the government increases spending and finances the expenditures by borrowing in the domestic capital markets. If the nation has highly mobile international capital markets and a flexible exchange rate system, what happens to the real GDP and reserve-related (central bank) transactions in the context of the Three-Sector-Model?
a. Real GDP rises, and reserve-related (central bank) transactions become more positive (or less negative). b. Real GDP rises, and reserve-related (central bank) transactions remain the same. c. Real GDP and reserve-related (central bank) transactions remain the same. d. There is not enough information to determine what happens to these two macroeconomic variables. e. Real GDP falls, and reserve-related (central bank) transactions remain the same.
Samuelson and Solow argued that when unemployment is high,
a. aggregate demand is high, which puts upward pressure on wages and prices. b. aggregate demand is high, which puts downward pressure on wages and prices. c. aggregate demand is low, which puts upward pressure on wages and prices. d. aggregate demand is low, which puts downward pressure on wages and prices.