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# Answers PS9 - Econ 3140-2 Fall 2009 Problem Set 9 Answer...

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Econ 3140-2 Fall 2009 Problem Set 9 Answer Key 1. (a) 5 (b) 8% (c) 0% 2. (a) Exchange rate rises, net exports fall. (b) Exchange rate rises, net exports rise. (c) Exchange rate rises, net exports rise. (d) Exchange rate falls, net exports fall. (e) Exchange rate falls, net exports rise. 3. (a) AD intersects AS at 1000 = 400 + 50 M P , which means M P = 12 . With M = 48 francs, P = 4 francs/bottle. Use the formula e nom = e P For P = 5 wedges/bottle 20 crowns/wedge = 4 francs/bottle = 25 crowns/franc. (b) At 50 crowns/franc, the franc is overvalued as the o¢ cial rate exceeds the funda- mental value. The domestic Central Bank will lose reserve assets over time if it tries to maintain the o¢ cial rate. (c) To get e nom = 50 crowns/franc for the fundamental value, use the formula e nom = e P For P 50 crowns/franc = 5 wedges/bottle 20 crowns/wedge = P francs/bottle, so P = 2 francs/bottle. Since M P = 12 , you need M = 24 francs to get P = 2 francs/bottle. 4. (a) Domestic country: output falls, real interest rate falls, and net exports rise. Foreign country: output falls, real interest rate falls, and net exports fall.

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