midterm2-answers - 1. Productivity growth has slowed in...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1. Productivity growth has slowed in United States relative to other countries. This has implications for the real exchange rate as well as for the long-run nominal exchange rate. a) (5 points) What happens to the United States’ real exchange rate if the United States has a one-time decrease in productivity relative to that of another country? What happens to its nominal exchange rate? A one-time decrease in US productivity relative to that of another country will cause the real dollar exchange rate to appreciate. The real appreciation combined with the fall in relative US output makes the effect on the long-run nominal exchange arte ambiguous. b) (5 points) How does the effect on the nominal exchange rate differ if, instead of a one-time drop in productivity, United States productivity relative to that of another country continues to decline for a very long time? In this case there is a continual expected appreciation of the real exchange rate of the dollar against the other currency. The depreciation of the nominal exchange rate is greater.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2. Consider the following comment:
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 5

midterm2-answers - 1. Productivity growth has slowed in...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online