36. If the exchange rate rises, domestic goods become relatively ______ expensiv

Question

36. If the exchange rate rises, domestic goods become relatively ______ expensive. This change in the

affordability of domestic goods makes domestic goods _____ attractive to foreigners. So, _______

______. (choose - more,/less, imports/exports, fall/rise) (2 Points)

37. What is the political business cycle and how does it relate to whether the central bank should have

discretion or use a rule?

38. Why is there a lag between the Fed’s actions and the economy’s response? (2 Points)

39. By law what goals are the Federal Reserve to pursue? What, if any, specific weights are given for

these goals? (2 points)

40. Economists believe that a little bit of inflation may be a good thing. What are the potential benefits of inflation? (2 Points)

Explanation / Answer

Rise in exchange rate implies that value of domestic currency in terms of foriegn currency has increased.

In other words, less units of domestic currency are now needed to buy 1 unit of foreign currency or more units of foriegn currency are needed to buy 1 unit of domestic currency.

As more units of foriegn currency are now needed to buy 1 unit of domestic currency, foriegners will have to spend more of their currency to buy same quantity of domestic goods as they are buying before exchange rate rises.

Thus, domestic goods become relatively more expensive to foriegners.

This relative expensiveness of domestic goods to foriegners will make domestic goods less attractive to foriegners.

Thus, they will buy less of domestic goods and thus exports of country will fall.

So, if exchange rate rises, domestic goods become relatively more expensive. This change in the affordability of domestic goods make domestic goods less attractive to foriegners. So, exports fall.

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