None Consider the response of current account to exchange rate changes studied in class. In class, we showedthat the response of the current account depends on the relative strength of the price (price of exportsand price of imports) and volume (quantity of exports and quantity of imports) eşects. I assumed in classthat the volume esects dominate. We derived the AA-DD model under that assumption. In this exerciseyou are asked to re-derive AA-DD model under an alternative assumption that the volume efect isweaker than the price efect. Please discuss how the AA and DD curves will change (if at all) under thisalternative assumption. Plot your Öndings on the "new" AA-DD diagram.

Detailed explanation:Here is the new AA-DD diagram with the weaker volume effects:

Answered: Consider the response of current…

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter23: The International Trade And Capital Flows

Section: Chapter Questions

Problem 46P: Imagine that the economy of Germany finds itself in the following situation: the government budget...

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Why does the trade balance and the current account balance track so closely together over time?
A case study in the chapter analyzed purchasingpower parity for several countries using the pricc ofBig Macs. Here arc data for a few more countries: a. For each country, compute the predicted exchangerate of the local currency per U.S. dollar. (Recallthat the U.S. price o( a Big Mac was $4.93.)b. According to purchasing-power parity, what is thepredicted exchange rate between the Hungarianforint and the Canadian dollar? What is the actualexchange rate?c. How well docs the theory of purchasing-powerparity explain exchange rates?
Select and drag answers to each step to describe the following process in the correct order: The process by which the current account may adjust when the government of a country, Tradavia, stimulates aggregate demand by increasing government spending, assuming the country has a floating exchange rate. Step 1 Step 2 Step 3 Step 4 The exchange rate falls Demand for exports falls Current account position may be unchanged Consumption, including consumption of imports, rises Demand for exports increases The exchange rate rises PHILIPS
Suppose more companies begin to “nudge” their employees into saving for retirement throughthe use of automatic enrollment plans. Use the long-run model of a small open economy to graphically illustrate the impact of the rise in retirement savings on the exchange rate and the trade balance. Explain the results of your graphical analysis in detail. Assume that the country starts from a position of the trade balance. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction that the curves shift; and v. the new long-runequilibrium values
Evaluate the following statement: "if lower exchange rates increase a nation's exports, the govermment should do everything in its power to anure that the exchange rate for its cumency is an low as it can possbly be This statement does nat acknowledge that lower exchange rates OA couid result in a reluctance from other countries to accept this nation's currency for payment of any goodn or services OB. could make a currency virtually worthless. O C. make a nation's imports more expensive. COD. None of the above responses are acknowledged by the statement.
What is happening to the U.S. real exchange rate ineach of the following situations? Explain.a. The U.S. nominal exchange rate is unchanged,but prices rise faster in the United States thanabroad.b. The U.S. nominal exchange rate is unchanged, butprices rise faster abroad than in the United States.c. The U.S. nominal exchange rate declines, andprices are unchanged in the United States andabroad.d. The U.S. nominal exchange rate declines, andprices rise faster abroad than in the United States.
Consider the foreign exchange market. For each of the scenarios below, answer thefollowing questions: (1) Which curve moves? (2) In which direction does it move? (3)What happens to the nominal exchange rate in equilibrium (i.e., does the US Dollarappreciate or depreciate)?(a) Brazil places tariffs on US products, limiting imports from America.(b) The US becomes a much riskier place to invest because of widespread politicalunrest.(c) Firms in the UK become much more profitable than those in the US.(d) The global economy surges, sparking higher consumption everywhere in the world.(e) Japan’s central bank cuts interest rates in that country.(f) Mexico’s firms do a much better job of marketing their products to the UnitedStates.
In an open economy, a permanent beneficial suply shock (s< 0)implie tha the domestic real exchange rate wil: Oappreciate as the est of the word buys the domestic curency Oremain unchanged because of fsetig movements n he domestic prie level Oremain unchanged because of ffseting movements in realinteret rates Odepreciate so as to crowd-in net exports
Consider an OLG economy where each generation has 50 bananas when young, and 10 bananas when old. Suppose central bank prints out 4 unit of money, give to gen 0 for free. Solve for equilibrium exchange rate "1 money = ??? bananas". Consider an OLG economy where each generation has 20 bananas when young, and 12 bananas when old. Suppose central bank prints out 2 unit of money, give to gen 0 for free. Solve for equilibrium exchange rate "1 money = ??? bananas".
Suppose the United States decides to subsidize theexport of U.S. agricultural products, but it does notincrease taxes or decrease any other governmentspending to offset this expenditure. Using a threepanel diagram, show what happens to nationalsaving, domestic investment, net capital outflow, theinterest rate, the exchange rate, and the trade balance.Also explain in words how this U.S. policy affects theamount of imports, exports, and net exports.
Sometimes, analysts use the price of specific products in different locations to compare currency valuation and purchasing power. For example, the Big Mac Index com- pares the purchasing power parity of many countries based on the price of a Big Mac. Locate the latest edi- tion of this index that is accessible. Identify the five countries (and their currencies) with the lowest pur- chasing power parity according to this classification. Which currencies, if any, are overvalued?
Suppose that Americans decide to increase theirsaving.a. If the elasticity of U.S. net capital outflow withrespect to the real interest rate is very high, willthis increase in private saving have a large orsmall effect on U.S. domestic investment?b. If the elasticity of U.S. exports with respect to thereal exchange rate is very low, will this increase inprivate saving have a large or small effect on theU.S. real exchange rate?

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