ECON216_Spring2011_Tutorials_Chapter_13_questions_with_solution

ECON216_Spring2011_Tutorials_Chapter_13_questions_with_solution

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Chapter 13 Questions with Solution 1. a. Why is a depreciation inflationary? b. Why is a depreciation of the nation’s currency not feasible to eliminate a deficit if the nation’s demand and supply curves of foreign exchange are inelastic? a. A depreciation is inflationary because the country needs more of its currency to purchase each unit of the foreign currency. Therefore, even if the foreign price of a foreign good remains unchanged, it will cost more for the nation to purchase in terms of the domestic currency. b. If the nation’s demand and supply curve of the foreign currency are inelastic, a depreciation will not be feasible to correct a deficit in the nation’s balance of payments because the depreciation will be very inflationary (and thus create an inflation problem for the nation, which may worse than its balance-of-payments deficit problem). 2. a. What happens to the trade balance of a deficit nation if its currency depreciates from a position of full employment? b.
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This note was uploaded on 03/19/2012 for the course ECON 215 taught by Professor Rodgers during the Three '08 term at University of Wollongong, Australia.

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ECON216_Spring2011_Tutorials_Chapter_13_questions_with_solution

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