According the monetary approach, in the long run, a currency depreciates when the country's interest rate...

According the monetary approach, in the long run, a currency depreciates when the country's interest rate rises relative to another country's interest rate. Explain.

Expert Solution

Answer:

When a country's interest rates rise, the currency of that country depreciates in the long run.

Let us understand this with the following steps:

1. When interest rate of a country increase, it becomes an attractive investment destination for the people outside. They start investing more and more money in our country to earn a better rate of interest.

2. Since lot of money starts pouring in, it leads to an increase in money supply

3. When money supply increases, it causes a situation of inflation in the long run.

4. Inflation in home country makes goods of the country expensive and unattractive.

5. As a result, people of home country start importing goods from outside.

6. More imports and less exports, lead to sale of home currency (to buy foreign currency and make payment for imports)

7. Supply of home currency increases and it depreciates in the long run.

I hope you like my explanation:)

Rahul Sunny answered 1 year ago

According to the long-run (i.e., monetary) approach to exchange rate, an exogenous increase in domestic interest...

According to the long-run (i.e., monetary) approach to exchange rate, an exogenous increase in domestic interest rate (increases/decreases) real money demand, and thereby the price level (increases/decreases). As a consequence, domestic currency (depreciates/appreciates).

When a country depreciates its currency then _ in the short run. A.)imports will decrease and...

When a country depreciates its currency then _ in the short run. A.)imports will decrease and exports will decrease. B.) imports will increase and exports will increase. C.) imports will decrease and exports will increase. D.) exports will increase but imports will not be affected.

Explain how to forecast the long -run exchange rate based on the Monetary Approach.

What are the short-run and long-run effects of monetary tightening on nominal interest rate? 12. Ture...

What are the short-run and long-run effects of monetary tightening on nominal interest rate? 12. Ture of False (based on Question 11 above): In the short run, normal interest rate does not rise as much as the real interest rate. (Please justify)

The exchange rate of a currency is the price paid in one country's currency for the...

The exchange rate of a currency is the price paid in one country's currency for the currency of another country. If a company in the United States sources parts from a company in Europe, dollars will need to be converted to euros to pay for the parts. This need to convert currency introduces uncertainty as to the actual cost of the parts, since the exchange rate at the time the price is quoted may be different from the rate when...

Under the monetary approach to exchange rates, if there is a rise in a country's home...

Under the monetary approach to exchange rates, if there is a rise in a country's home money supply and, ceteris paribus, then the exchange rate should: a. depreciate. b. hold steady. c. appreciate. d. appreciate and then remain steady. Why? Explain intuitively and show your work by using “monetary approach to exchange rates” model.

When the currency denominating an international bond depreciates against the domestic currency of the investor, the...

When the currency denominating an international bond depreciates against the domestic currency of the investor, the value of that bond to the investor ______(rises OR Falls) . The risk of this occurrence is known as ________ ( liquidity, interest rate, exchange rate, OR credit) risk. 2- assume a direct quotation of $0.80 per euro. Suppose you have also been given a direct quotation of $0.1 per peso. The cross exchange rate, indicating the euro value in terms of pesos, is _______euros...

In the long run the real interest rate is determined by and in the short-run the...

In the long run the real interest rate is determined by and in the short-run the Federal Reserve can control the real interest rate by setting the nominal interest rate if inflation adjusts Select one: a. saving and investment; slowly b. the Federal Reserve; to equal the increase in the money supply c. the Federal Reserve; slowly d. saving and investment; quickly

When a country's currency appreciates, is this generally good news or bad news for a country's...

When a country's currency appreciates, is this generally good news or bad news for a country's consumers? Is it generally good or bad news for the country's businesses? Explain your reasoning - try to use examples.

a) “According to the long-run classical model, there will be a decrease in the world interest...

a) “According to the long-run classical model, there will be a decrease in the world interest rate and the world level of investment when the aging populations of industrial countries start running down their savings and, at the same time, the investment appetite of emerging economies begins to slow down.” True/False, explain with the aid of one diagram for the world market for loanable funds. (10 points) Note: The world as a whole is a closed economy. b) A new...

Question