Consider the determination of real exchange rates in a large open economy with a flexible exchange...

Consider the determination of real exchange rates in a large open economy with a flexible exchange rate regime. If today’s technology increase, e* will (increase/decrease/stay/none). If tomorrow’s technology is expected to improve, e* will (increase/decrease/stay/none) . If M decreases, e* will (increase/decrease/stay/none). If the government decreases G1 while keeps G2 unchanged, e* will (increase/decrease/stay/none),

Solutions

Expert Solution

a).

If the today’s technology increases that will increase AS, => the price level decreases. Now, the exchange rate in the ratio of “home price” to “foreign price”, => as the home price decrease given the foreign price that the exchange rate decreases.

b).

If the tomorrow’s technology is expected to improve, that will induce people to reduce their expectation, => the price level decreases. Now, the exchange rate in the ratio of “home price” to “foreign price”, => as the home price decrease given the foreign price that the exchange rate decreases.

c).

The decrease in money supply, decrease the price level. Now, the exchange rate in the ratio of “home price” to “foreign price”, => as the home price decrease given the foreign price that the exchange rate decreases.

d).

If the home government decreases its spending and the foreign government spending remains same, => the home price decreases. Now, the exchange rate in the ratio of “home price” to “foreign price”, => as the home price decrease given the foreign price that the exchange rate decreases.

Rahul Sunny answered 1 month ago

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