Effects of a rise in real domestic money demand, International Economics

Assignment Help:

Q. Using the AA - DD framework, compare the effects of a rise in real domestic money demand under flexible and under fixed exchange-rate regimes.

Answer: Under floating an increase in real domestic money demand shifts the AA curve down and leftward, income falls and E reduce that is the domestic currency appreciates. If the increase in real domestic money supply is permanent it will initiates eventually to a fall in the home price level. In a fixed exchange rate the amend in real money demand doesn't affect the economy at all. The AA curve does not move. To avoid the home currency from appreciating the central bank buys foreign reserves with domestic money until the real money supply increases by an amount equal to the increase in real money demand. This intervention has the result of keeping the AA in its original position preventing any alteration in output. This is a powerful argument in favour of fixed rates if the majority of the shocks that buffet the economy come from the home money market.


Related Discussions:- Effects of a rise in real domestic money demand

Effects of 9/11 on the size of the eurocurrency markets, Q. What do you exp...

Q. What do you expect would be the effects of 9/11 on the size of the Eurocurrency markets? Answer: Will increase because of fear that foreign deposits in the United States wi

Explain purchasing power parity, Q. Explain Purchasing Power Parity...

Q. Explain Purchasing Power Parity. Answer: PPP () states that the exchange rate between two countries' currencies equals the ratio of the countries' price levels.

WTO, Special and Differential treatment

Special and Differential treatment

Behavior of inevitably and exchange rates, Q. "Even under flexible exchang...

Q. "Even under flexible exchange rate regime, governments should not be indifferent to the behavior of inevitably and exchange rates surrendered some of their policy autonomy in o

Discuss the hechscher-ohlin model, Q. Countries that are willing to toler...

Q. Countries that are willing to tolerate an unusually high quantity of pollution relative to their supplies of other factors would leads to export "pollution-intensive" goods. D

Heckscher-ohlin theory, Q. Countries do not in fact export the goods the H...

Q. Countries do not in fact export the goods the H.O. theory predicts. Discuss. Answer: This statement isn't true that though one may find several cases where it seems to be

Offer a subsidy to a profitable and successful business, Q. How could the ...

Q. How could the U.S. government justify its decision to offer a subsidy to a profitable and successful business? Answer: It could indicate that this $10 million pump-priming

International trade, International business involves the management of inte...

International business involves the management of international risk. To minimize risks commercial parties utilize independent guarantees and standby letters of credit. (a)  Dis

Effects of increase in real national income on interest rate, What will be ...

What will be the effects of an increase in real national income on the interest rate? Answer: An enhance in real national income will increase the interest rate.  If investment

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd