Econ 110B Ch18 Solutions

Econ 110B Ch18 Solutions - Economics 110B Solutions to...

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Economics 110B Solutions to Practice Questions for Chapter 18 1) There are three notions of openness. First, there is openness in the goods market where agents buy domestic and foreign goods and domestic firms sell goods abroad. Second, there is openness in financial markets where individuals can purchase, for example, domestic or foreign bonds. And third, there is openness in factor markets where firms can locate either domestically or in other countries and workers can also move between countries. 2) The real exchange rate is the price of domestic goods in terms of foreign goods. It is represented as EP/P*. An increase in E, a nominal appreciation, raises the foreign price of the dollar. This will also raise the relative price of domestic goods. An increase in P*, the foreign price level, reflects an increase in the foreign currency price of foreign goods. This will reduce the relative price of domestic goods. And finally, an increase in P, the domestic price level, reflects an increase in the dollar price of domestic goods. This will increase the relative price of domestic goods in terms of
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