EBK PRINCIPLES OF MACROECONOMICS
12th Edition
ISBN: 9780134079592
Author: Oster
Publisher: YUZU
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Chapter 19, Problem 3.8P
To determine
The changes in the interest rate on the basis of price index and interest rate.
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In the picture below is the table to answer this question. The highlighted one is my guess which is wrong.
Based on the Exchange rates above, How might international travel be affected by the exchange rates above?
A)More Americans can afford to travel to Canada.B)More Canadians will be able to afford travel in the US.
C)More Americans can afford to travel to Great Britain.D)Mexico is an expensive place for Americans to travel.
Suppose that there are only two countries in the world: Localia (which is us), that uses the
"Localios" (LCL) as its currency, and Nearovia (our trading partner), which uses “Nearos" (NER)
as its currency. For questions 1-3, assume that this exchange rate between the NER and the LCL
is flexible.
Now consider the Supply & Demand market for domestic Localios. Suppose also that the Central
Bank cuts interest rates at home in Localia.
1. What would we expect to happen to the exchange rate for LCL as a result of this rate
cut? Explain using the Supply and Demand Figure for LCL and explain why any
movements of any of the curves occur.
2. Would this create a recessionary gap, inflationary gap, or neither in Localia? Explain
using your AD-AS Figure for Localia.
3. Similarly, what is the effect of the interest rate cut in Localia on the exchange rate for
Nearos and on short-term GDP in Nearovia? Explain using both the Supply and Demands
figure for NER and the AD-AS figure for Nearovia.
Country A follows a fixed exchange rate policy that pegs its currency to the currency
of country B, which is its main trading partner in a world where international capital
is fully mobile. However, due to unresolved structural inefficiencies (for example,
excessive bureaucracy), prices in country A tend to increase more than prices in
country B. Over time, if nothing else changes, and provided that country A is
committed to its current exchange rate policy, which of the following problems is
not anticipated for country A?
a.
Economic recession.
O b. Growing deficit in international trade balance.
c. Worsening inflation.
Od. Decreasing reserve assets.
Oe. Growing external indebtedness.
Chapter 19 Solutions
EBK PRINCIPLES OF MACROECONOMICS
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