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Q. 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.
Answer: Since the asset market adjusts extremely quickly the exchange rate drops immediately to a point on the AA schedule and 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 surplus demand escorts to an immediate fall in the exchange rate.
Explain why Relative PPP is useful when comparing countries that base their price levels on different product baskets. Answer: For instance If the U.S price level increase by
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Explain the effects of a permanent increase in the U.S. money supply in the short run and in the long run. Assume that the U.S. real national income is constant. A raise in th
Q. How can long-run values in the real exchange rate change? Answer: A elevate in world relative demand for U.S output origins a long-run real appreciation of the dollar
Discuss the differences between Absolute PPP and Relative PPP . Answer: Absolute Purchasing Power Parity (PPP) states that the exchange rate between two currencies equals the
Q. "Under floating rates, the economy is more vulnerable to shocks coming from the domestic money market." Discuss. Answer: It is true statement, under floating rates an incr
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