Explain how depreciation of the dollar against the peso

Reference no: EM131236758

Assume a two-country world containing country A (whose currency is the dollar) and country B (whose currency is the peso). In this context, and using relevant graphs, explain how a depreciation of the dollar against the peso (for example, a 10% depreciation) conceptually affects the quantity of A’s exports to B and the quantity of A’s imports from B. (You can use either dollars or pesos on the vertical axes of your graphs. Also, assume that “pass-through” is complete.) Then carefully explain why economists say that such a depreciation could actually worsen the trade balance (or current account balance) of country A and indicate the Marshall-Lerner condition. Finally, define the “J curve” and give a very brief explanation of why it has the shape that it does.

Reference no: EM131236758

Questions Cloud

Excess supply of money leads to balance-of-payments deficit : In a situation of a fixed exchange rate, explain why, in the monetary approach, an excess supply of money leads to a balance-of-payments deficit. Why is the deficit only temporary? How might advocates of the monetary approach explain a long-lasting d..

Explain the implication for countrys exchange rate : Explain the implication for a country’s exchange rate in the monetary approach and in the portfolio balance approach of (a) an autonomous decline in the demand for money at each interest rate by the country’s citizens, and (b) a change in expectation..

Assures all workers earn wage above the poverty level : Should the United States pass a minimum wage that assures all workers earn a wage above the poverty level? Defend your position using economic principles. The response to this question is not as straightforward as it might seem. Consider the poverty ..

Could there be overshooting of the exchange rate : Could there be “overshooting” of the exchange rate in the Dornbusch model if goods markets adjusted as rapidly as asset markets? Why or why not? What would be the analog to the general phenomenon of “overshooting” in a situation of fixed exchange rat..

Explain how depreciation of the dollar against the peso : Assume a two-country world containing country A (whose currency is the dollar) and country B (whose currency is the peso). In this context, and using relevant graphs, explain how a depreciation of the dollar against the peso (for example, a 10% depre..

Equal autonomous increase in exports and imports : In the context of a Keynesian open-economy income model for a country, carefully explain the impact of each of the following autonomous events upon equilibrium income in the country and upon the country’s current account balance: (a) an increase in d..

Autonomous consumption increases : Suppose that autonomous consumption increases but that, unlike the situation in the simple Keynesian model of this chapter, some of this autonomous consumption increase is spent on imports (say an amount equal to MPM times the autonomous consumption ..

Does the existence of the current account deficit imply : If a country has a current account deficit, this is often referred to as a situation where the country is “spending beyond its means.” What does this phrase mean in terms of the simple Keynesian model? Does the existence of the current account defici..

Framework with fixed exchange rates : Explain, in the IS/LM/BP framework with fixed exchange rates, the impact of an autonomous increase in foreign demand for a country’s exports upon the country’s national income, money supply, and balance of payments. If there is no impact on a variabl..

User Account

All Pages