Macroeconomics Questions: Draw two pictures side by side. Keynesian AS-AD showin

Question

Macroeconomics Questions:

Draw two pictures side by side. Keynesian AS-AD showing potential output and Phillips Curve labeling the natural rate of unemployment and expected rate of inflation.

Draw the pictures and/or label the location of the economy so that the economy is in a boom (producing past potential).

Now, assume that the government acts to keep the economy producing beyond potential for a prolonged period of time, show what changes would occur in each picture.

Explain how the changes on the two pictures capture the same phenomena.

Explanation / Answer

If there are no real or financial barriers to international capital and goods flows, FIs can eliminate all foreign exchange rate risk exposure. Sources of foreign exchange risk exposure include international differentials in real prices, cross-country differences in the real rate of interest (perhaps, as a result of differential rates of time preference), regulatory and government intervention and restrictions on capital movements, trade barriers, and tariffs.

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