4.1 Suppose that interest rates in Australia rise relative to those in other countries. (a) How...

4.1 Suppose that interest rates in Australia rise relative to those in other countries.

(a) How will this policy affect real GDP in the short run if Australia is a closed economy? (b) How will this policy affect real GDP in the short run if Australia is an open economy? (c) How will your answer to part b change if interest rates also rise in the countries that are the major trading partners of Australia?

Expert Solution

a) Interest rate in Australia rise and Australia is a closed economy, investors of Australia are left with no other choice other than borrow at a higher interest rate which will hit the level of investment that take place in country. On the other hand, people who have spare money will prefer to keep it in bank to earn higher interest rate. Both of these factors will reduce investment level. As Investment and aggregate demand have positive relationship with each other, fall in level of investment will reduce aggregate demand in the economy in short run.

b) If Australia is open economy and interest rate in Australia is rising relative to other countries, it will attract alot of foreign investment because they can earn higher rate of interest in Australia. On the other hand, domestic investors will try investing in other countries because they can get a loan at lower interest from there. So, the effect on real GDP will be ambiguous which is dependent on the inflow and outflow of cash.

c) If interest rate in other countries also fall, it will decrease level of investment as well as real GDP for a while till investors understand that they are left with no other option other than borrowing at higher interest rate which will again raise the real GDP level.

Rahul Sunny answered 2 years ago

If a nation's interest rates steadily increases compared to those of other countries, then the exchange...

If a nation's interest rates steadily increases compared to those of other countries, then the exchange rate of its currency will tend to appreciate as the demand for its currency decreases. depreciate as the demand for its currency increases. appreciate as the demand for its currency increases. depreciate as the demand for its currency decreases.

Suppose interest rates in the United States, but they don’t rise in other nations. As a...

Suppose interest rates in the United States, but they don’t rise in other nations. As a result of this change The U.S. dollar appreciates The U.S. dollar depreciates U.S. exports will increase U.S. imports will decrease Price levels in the unites states will increase Suppose Americans began purchasing real assets in Europe. How would this impact the foreign exchange market for the euro and the dollar price of the euro? Decrease/increase Increase/ decrease Increase/increase Decrease/Decrease Decrease/Not change Suppose interest rates...

When the price level in Australia rises relative to the price level of other countries, ceteris...

When the price level in Australia rises relative to the price level of other countries, ceteris paribus, ________ will rise, ________ will fall, and ______ will fall. A) imports; exports; net exports B) exports; imports; net exports C) net exports; exports; imports D) net exports; imports; exports

How do corporate tax rates in the United States compare to those of other countries around...

How do corporate tax rates in the United States compare to those of other countries around the world? Rates for both corporations and individuals were changed in 2017 after President Trump signed the Tax Cuts and Jobs Act. What was the impact of these changes on U.S. corporations? Who has benefited from these changes? What are the potential impacts to corporate taxation as a result of the upcoming 2020 Presidential election? What would you recommend regarding corporate income tax rates?

1. a)Countries Australia and France have their interest rates to be 8% and 12 %, respectively....

1. a)Countries Australia and France have their interest rates to be 8% and 12 %, respectively. If their currencies trade according to 2 Australian $s buy one euro in the spot market, what will their future spot rate be in the aforementioned context? b) Define IFE and explain the fact of how it occurs. Is there any deviation from it?

a)What is the expected relationship between the relative real interest rates of two countries and the...

a)What is the expected relationship between the relative real interest rates of two countries and the exchange rate of their currencies? b. Assume that the level of capital flows between the U.S. and the country of Krendo is negligible (close to zero) and will continue to be negligible. There is a substantial amount of trade between the U.S. and the country of Krendo and no capital flows. How will high inflation and high interest rates affect the value of the...

1-Why are interest rates normally similar for those European countries that use the euro as their...

1-Why are interest rates normally similar for those European countries that use the euro as their currency? 2- why the government interest rate of one country could be slightly higher than the government interest rate of another country, even though the euro is the currency used in both countries? If you can advise a book to read about the subject will be great

6. Inflation, interest rates, and exchange rates Relative inflation rates affect interest rates, exchange rates, the...

6. Inflation, interest rates, and exchange rates Relative inflation rates affect interest rates, exchange rates, the overall economic health of a country, and the operations and profitability of multinational companies. Consider the following statement: Countries with lower inflation rates will have lower interest rates. Based on your understanding of the relationship between relative inflation rates and exchange rates, identify whether the preceding statement is valid or invalid. The statement is valid, because the nominal interest rate is the sum of...

4.1 According to the article by Karen Maley, if Australian interest rates are raised, this is...

4.1 According to the article by Karen Maley, if Australian interest rates are raised, this is likely to push the Australian dollar higher. A likely explanation for this is: A. Capital inflows fall and capital outflows rise, implying the demand for the AUD increases and supply of the AUD increases B. Capital inflows fall and capital outflows rise, implying the demand for the AUD increases and supply of the AUD decreases C. Capital inflows rise and capital outflows fall, implying the demand for...

True or False? 5. In general, if interest rates rise, the prices of existing bonds rise....

True or False? 5. In general, if interest rates rise, the prices of existing bonds rise. 6. If a company defaults on its bonds, interest continues to accrue but may not be paid. 7. Current yield provides the best measure of a bond’s investment return. 8. Preferred stock dividends are usually fixed. 9. If a cumulative preferred stock’s dividend is in arrears, the dividend is not being paid. 10. Corporations are obligated to pay cash dividends if they generate earnings....

Question