In an open economy, an increase in the real exchange rate (a real appreciation) will lead to which of the following outcomes?
Why
Tap an answer. The explanation will appear here, including why each wrong option is wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Not quite. B is correct.
A rise in the real exchange rate is a real appreciation, making foreign goods cheaper relative to domestic goods. This shifts domestic expenditure toward foreign products, thereby increasing import volume.
Tap any option to see why it's right or wrong.
Your progress
Chapter 19: not started.
Suppose price levels in both the domestic and foreign economies remain fixed. Under these conditions, how do the real exchange rate and the nominal exchange rate relate to each other?
Why
Tap an answer. The explanation will appear here, including why each wrong option is wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Not quite. D is correct.
By definition, the real exchange rate is \epsilon = EP/P^{*}. When the domestic price level P and the foreign price level P^{*} are constant, any proportional change in the nominal exchange rate E results in an identical proportional change in \epsilon.
Tap any option to see why it's right or wrong.
Your progress
Chapter 19: not started.
Assume the exchange rate is allowed to fluctuate freely, and let E denote the price of domestic currency in terms of foreign currency (so a depreciation is a decrease in E). Using the IS-LM-IP framework, explain the macroeconomic effects of a reduction in foreign output (Y*) on the domestic economy. In your response, describe the shifts in the relevant curves and explain what happens to equilibrium domestic output (Y), the domestic interest rate (i), the exchange rate (E), and net exports (NX).
Why
Write your answer, then tap Show model answer. The model answer and marking points will appear here.
Compare with your answer.
Model answer. 1. Initial shock and curve shifts: A decrease in foreign output (Y*) reduces foreign demand for domestic exports (X), so net exports (NX) and aggregate demand fall. This shifts the IS curve to the left. The IP and LM curves do not shift.
2. Goods and financial market equilibrium: As aggregate demand decreases, domestic production and output (Y) fall. The decline in output reduces the demand for money, which lowers the equilibrium domestic interest rate (i).
3. Foreign exchange market adjustment: Along the IP curve, the lower domestic interest rate makes domestic assets less attractive. This depreciates the domestic currency (a reduction in E, given E is the price of domestic currency in foreign currency).
4. Overall effect on equilibrium variables:
- Output (Y) decreases.
- The domestic interest rate (i) decreases.
- The exchange rate (E) decreases (depreciates).
- Net exports (NX): The decrease in Y* directly reduces NX. The subsequent fall in domestic output (fewer imports) and the depreciation (better competitiveness) partially offset this. Overall, net exports decrease.
- States that a decrease in Y* lowers exports, causing the IS curve to shift to the left (1 point).
- Explains that domestic output (Y) falls, leading to a decrease in the equilibrium domestic interest rate (i) (1 point).
- Explains that the drop in the domestic interest rate causes a movement along the IP curve, depreciating the domestic currency (a reduction in E under the stated convention) (1 point).
- Evaluates the overall effect on Y (decreases), i (decreases), E (decreases/depreciates), and NX (decreases overall, though cushioned by depreciation and lower imports) (1 point).
Your progress
Chapter 19: not started.