Refer to the above figure. Use the DD-AA model to examine and compare the response of an economy under fixed and floating exchange rate to a temporary fall in foreign demand for its exports
What will be an ideal response?
The DD curve shifts to the left. When the exchange rate floats, because the demand shift is assumed to be temporary, it does not change the long-run expected exchange rate and so does not move the asset market equilibrium schedule AA. Thus, E rises, i.e. the currency depreciates and output falls.
Under fixed exchange rate, the central bank must prevent the currency depreciation that occurs under a floating rate; thus, it buys domestic money with foreign currency, reducing the domestic money supply and shifting the AA to the left and down. E will remain constant and output will fall.
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Which of the following best defines foreign exchange?
a. a trade between two countries b. the market where exporting and importing activities take place c. the price of a currency relative to another currency d. the currency of another country used for trading e. the dollars that the United States uses to buy goods from other countries
National health insurance programs:
A. are usually too costly for developing nations to implement. B. can increase use of health clinics versus traditional village doctors, who often have no medical training. C. are always less efficient than privatized programs. D. have solved the problem of providing high-quality care in places like India.
Assuming price elasticity of demand is reported as an absolute value, a price elasticity of one indicates:
A. the percentage change in quantity demanded will equal one. B. the percentage change in quantity demanded will equal the percentage change in price. C. both the percentage change in price and quantity demanded must equal one. D. the percentage change in quantity demanded and the percentage change in price must sum to one.
Define the Taylor rule.
What will be an ideal response?