Explain and show graphically the effect of an increase in the expected inflation rate on the equilibrium exchange rate, everything else held constant
What will be an ideal response?
See figure below.
When the expected inflation rate increases, the relative expected return on domestic assets is affected two ways. First, through the Fisher effect, the domestic nominal interest rate will increase the expected return on domestic assets. Second, through purchasing power parity, the future value of the domestic exchange rate will decline which will decrease the expected return on domestic assets. Since it is generally believed that the effect of the change in the expected future value of the domestic exchange rate is larger than the Fisher effect, the net effect is a lower expected return on domestic assets. This will decrease the demand for domestic assets, which will cause the current value of the domestic exchange rate to depreciate.
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If the inflation rate in an economy is 5 percent and the income earned by workers increases by 5 percent, then _____
a. nominal income declines and real income increases b. both nominal income and real income increase by 5 percent c. nominal income increases and real income declines d. both nominal income and real income decrease by 5 percent e. nominal income increases by 5 percent and real income is unchanged
Most goods whose purchases are included in the investment component of GDP are used to produce other goods in future periods
a. True b. False Indicate whether the statement is true or false
Paul, a U.S. citizen, builds a telescope factory in Israel. His expenditures
a. increase U.S. and Israeli net capital outflow. b. increase U.S. net capital outflow, but decrease Israeli net capital outflow. c. decrease U.S. net capital outflow, but increase Israeli net capital outflow. d. None of the above is correct.
Both countries can benefit from trade when:
A. there are no trade barriers that are erected by either country. B. at least one country produces the good for which it has an absolute advantage. C. each specializes in producing the good for which it has a comparative advantage. D. each specializes in producing the good for which it has an absolute advantage.