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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.
Q. Present the case against floating exchange rates. Answer: 1.The discipline obligatory on individual countries by a fixed rate would be lost. 2. Undermine specu
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Assume the United States exports 1000 computers at a price of $3000 each and imports 15 UK autos at a price of 10000 pounds each. Assume that the dollar/pound exchange rate is $2 p
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Q. What are the reasons for the world as a whole running a substantial current account deficit? Answer: This deficit improved sharply in the early 1980s and has remained high.
Q. Explain why the European Union's current combination of rapid capital migration with limited labor migration may actually raise the cost of adjusting to product market shocks wi
Q. Economic theory in general and trade theory in particular are replete with equivalencies. For illustration, it is argued that for any specific tariff one can search an equival
#question.what is the baises for international trade.
What are the two main base of foreign trade ?
Q. Describe the chain of events leading to exchange rate determination for the following cases: 1. An increase in the U.S money supply 2. An increase in the growth rate of the
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