In the macroeconomic model of the open economy developed in the text, if the central bank...

In the macroeconomic model of the open economy developed in the text, if the central bank increases the money supply, the price level will:

Select one:

a. rise, the real interest rate will rise, the nominal interest rate will rise, the real exchange rate will rise and the nominal exchange rate will rise

b. rise, the real interest rate will be unaffected, the nominal interest rate will rise, the real exchange rate will be unaffected and the nominal exchange rate will rise

c. rise, the real interest rate will be unaffected, the nominal interest rate will be unaffected, the real exchange rate will be unaffected and the nominal exchange rate will be unaffected

d. rise, the real interest rate will be unaffected, the nominal interest rate will rise, the real exchange rate will be unaffected and the nominal exchange rate will fall

Expert Solution

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Question:

Answer:

d. rise, the real interest rate will be unaffected, the nominal interest rate will rise, the real exchange rate will be unaffected and the nominal exchange rate will fall.

Increasing money supply decrease interest rate and decreasing interest rate increase demand for money. Increasing demand for money increase consumption level and increasing consumption level increase price level. Real interest rate is inflation adjusted interest rate. Here inflation will not affected more so, the real interest rate will be unaffected. increasing price increase inflation then the central bank increase interest rate that increase nominal interest rate. Here both the interest rate and inflation both increase so, the real exchange rate will be unaffected but increasing inflation will decrease the purchasing power of money and currency will get depreciate.

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Rahul Sunny answered 1 year ago

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