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Q. Explain why under fixed exchange rate, monetary policy is ineffective whereas under floating exchange rate it is effective in rising output.
Answer: In floating by purchasing domestic assets the central bank cause an initial excess supply of domestic money that concurrently pushed the domestic interest rate downward and weakens the currency. Though under fixed exchange rate the central bank will oppose any tendency of the currency to depreciate by selling foreign assets for domestic money and consequently removing the initial excess supply of money its policy move has caused.
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Using examples, from the government, illustrate the significant opportunity cost.
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Q. The migration model of Todaro and Harris provided an important theoretical critique of the manufacturing-biased import-substitution trade-policy stance. Illustrate. Answer:
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(a) Consider there are two countries (country 1 and country 2) with two goods (X and Y). Further, under the assumptions of the Ricardian model, country 1 specialise in goods X. De
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Q. How much trade do currency unions create? Answer: The major result is that currency unions promote trade. One study originate that on average two countries that are
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