According to the monetary approach to exchange rate determination, how would an increase in foreign real income affect the value of domestic currency? In your explanation, discuss both the quantity theory and purchasing power parity (PPP).
What will be an ideal response?
POSSIBLE RESPONSE: We can use the quantity theory equations to determine the ratio of prices between countries. The equation is: P/Pf = (Ms/Msf) × (kf/k) × (Yf/Y), where (P/Pf) = ratio of domestic to foreign product price levels, (Ms/Msf) = ratio of domestic to foreign money supply, (kf/k) = ratio of domestic to foreign behavioral parameters, and (Yf/Y) = ratio of domestic to foreign real (constant price) incomes. We can also use absolute PPP to relate the ratio of product prices to the exchange-rate value of foreign currency (e): e = P/Pf.
An increase in foreign real income will cause the relative price level P/Pf to increase, other things equal. The increase in P/Pf will cause the foreign currency to appreciate, which indicates that the domestic currency will depreciate.
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A) both the bank's liabilities and the Fed's liabilities increase by $10 million. B) the bank's assets increase by $10 million, but there is no change at the Fed since it does not really have assets or liabilities. C) the bank's assets increase by $10 million and the Fed's liabilities increase by $10 million. D) both the bank's assets and the Fed's assets increase by $10 million.
Why might a country like Brazil have to offer a much higher interest rate on its government bonds than those offered by the Great Britain?
What will be an ideal response?
In a market characterized by many sellers, if an outsider devises a way to reduce transaction costs it will:
a. benefit both buyers and sellers. b. cause both buyers and sellers to lose. c. benefit the buyers but cause the sellers to lose. d. benefit the sellers but cause the buyers to lose.
If the owner of the firm, shown above is a profit maximizer, the firm should ________ in the short run.
A. expand output to lower costs B. continue to operate at the existing output C. shutdown D. More data is needed to say definitively what the firm should do.