What are some reasons that an "emerging market" country may choose a fixed exchange rate regime?
What will be an ideal response?
While political and monetary institutions are developing, the best monetary policy might be to peg the exchange rate to the currency of a low-inflation economy. Since, in the absence of capital controls, savings will flow into and out of the economy, a credible commitment to low inflation and financial stability is important. Typically, economic growth relies heavily on export performance, which suffers from excessive volatility of the exchange rate. Similarly, a relatively stable exchange rate supports the availability of critical imports. With an exchange-rate peg, domestic economic fluctuations will not be transmitted to the exchange rate, so adverse expectations-driven feedback loops may be avoided.
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Suppose an economy has a balanced federal budget, and a favorable supply shock hits the economy. Tax revenues will ________ and expenditures on transfer payments will ________, resulting in a budget ________
A) fall; fall; deficit B) increase; fall; surplus C) fall; increase; deficit D) increase; increase; surplus
Refer to Figure 4.8. If half of your friends go to the beach and half go to the park, you will receive the highest payoff by
A) going to the park. B) going to the beach. C) You will receive the same payoff whether you choose the beach or the park. D) You cannot determine your highest payoff from the data in the figure.
The price of a good rises by 12 percent and the price elasticity of demand for the good is 0.85. Which of the following is a CORRECT interpretation of these facts?
A) When the price rises by 12 percent, the quantity demanded decreased by 0.85 percent. B) For each 1 percent that the price rose, the quantity demanded decreased by 10.2 percent. C) For each 0.85 percent that the price rose, the quantity demanded decreased by 1 percent. D) For each 1 percent that the price rose, the quantity demanded decreased by 0.85 percent.
The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects
A) households B) banks C) government D) firms