Consider a country that is operating with a fixed exchange rate under conditions

Question

Consider a country that is operating with a fixed exchange rate under conditions of perfect mobility. a. Explain what effects you would expect an in increase in world interest rates to have on the equilibrium valus of the following domestic macroeconomic variables in such an economy, assuming no domestic policy response: the level of real GDP, the domestic interest rate, the current and non reserve financial of the balance of payments, and the central bank's stock of foreign exchange reserves. b. Describe two policy responses that the domestic economy could implement to restore the original level of real GDP, and show how they would work. Consider a country that is operating with a fixed exchange rate under conditions of perfect mobility. a. Explain what effects you would expect an in increase in world interest rates to have on the equilibrium valus of the following domestic macroeconomic variables in such an economy, assuming no domestic policy response: the level of real GDP, the domestic interest rate, the current and non reserve financial of the balance of payments, and the central bank's stock of foreign exchange reserves. b. Describe two policy responses that the domestic economy could implement to restore the original level of real GDP, and show how they would work. a. Explain what effects you would expect an in increase in world interest rates to have on the equilibrium valus of the following domestic macroeconomic variables in such an economy, assuming no domestic policy response: the level of real GDP, the domestic interest rate, the current and non reserve financial of the balance of payments, and the central bank's stock of foreign exchange reserves. b. Describe two policy responses that the domestic economy could implement to restore the original level of real GDP, and show how they would work.

Explanation / Answer

The exchange rate is the price of foreign currency in terms of home currency. The international trade between two countries allows exchange of goods and services. This exchange between two countries involves the exchange of paper money or currency. To conduct the trade one trading partner need the currency of other. The exchange rate determines how much home currency will need to purchase a basket of good that is priced as one unit of foreign currency.

There are two ypes of exchange rate ragime a country can follow: fixed or pegged and flexible exchange rate ragime. Under fixed exchange rate ragime, the value of the country's currency remains fixed against another currecy, or a basket of currency, or any valuable metarial such as gold.

Under perfect capital mobility the capital is free to move between country. An increase in world interest rate will move capital from home country to the world market. There will be increase in capita outflow from home market.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.