Imagine that the economy is at a point on the DD-AA schedule that is above both AA and DD and where both the output and asset markets are out of equilibrium. Explain what will happen next?
What will be an ideal response?
Since the asset market adjusts very quickly, the exchange rate drops immediately to a point on the AA schedule. There will be excess demand for the domestic currency because the high expected future appreciation rate of the domestic currency implies that the expected domestic currency return on foreign deposits is below that on domestic deposits. This excess demand leads to an immediate fall in the exchange rate.
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Forward and spot exchange rates
A) are necessarily equal. B) do not move closely together. C) are always such that the forward exchange rate is higher. D) move closely together and are equal on the value date. E) are unrelated to the value date.
Payments to households not in exchange for goods and services currently produced are:
a. transfer payments. b. government purchases. c. consumption expenditures. d. investment expenditures.
One reason why individuals with greater ability often receive higher wage rates is that they
a. face discrimination b. have low marginal products c. have high marginal revenue products d. face diminishing marginal returns e. often are employed in industries experiencing economies of scale
If demand is price elastic, then when price decreases, total revenue
a. decreases b. increases c. does not change d. is less than one e. is negative