Question

2. How do the fluctuations in the exchange rate influence the domestic price level?

3. What is a barter system? The drawbacks of this system are as follows:

4. Why is comparative advantage rather than absolute advantage the basis for trade?

5. Explain the concept of “lender of last resort.” What is discount rate?

Answer 1

2) when there is fluctuations in exchange rate say for example because of a positive shock exchange rate increases. That means domestic currency is now more powerful. It makes domestic goods and services more expensive for importers, or the export or our country is costlier now and import for us is cheaper. So foreign competition makes the demand for our goods and services to go down, due to lack of demand price level also decline. This way exchange rate affects price level in a nation.

3)a barter system is a system of exchange where one commodity is exchanged for another. The drawbacks of the system are-

a) problem in transportation and transportation cost.

b) it lacks in store value. Also it needs a lots of space for storage.

C)the terms of exchange were not fair some times.

D) it creates exploitation.

4) in case of absolute advantage if one nation has absolute advantage in production of both the commodity and the other nation has absolute disadvantage in production of both , there is no basis of trade there for both the countries. But comparative advantage theory States that even one country has advantage in production of both commodity there can be trade between two nations taking in to consideration the opportunity cost of production. So comparative advantage theory is more advanced and acceptable.

5)a lender of last resort is an institution, usually a country's central bank which offers loans to banks or other eligible institutions which are experiencing financial difficulty or are  considered highly risky.

Discount rate is an interest rate charged by central bank while lending money to the commercial banks.