Answers domestic country output falls real interest

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Chapter 19 / Exercise 10B
Fundamentals of Financial Management
Brigham
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Answers: Domestic country: output falls, real interest rate rises, and net exports rise. Foreign country: output falls, real interest rate falls, and net exports fall. There are no real effects in the long run. Level of difficulty: 2 Section: 13.4
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Fundamentals of Financial Management
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Chapter 19 / Exercise 10B
Fundamentals of Financial Management
Brigham
Expert Verified
Chapter 13 Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy 215 8. A classical economy is described by the equations AD: Y=1000 +100M/PAS: Y=1500 The real exchange rate is 3 bushels/bottle, the domestic nominal money supply is 30 florins, and the foreign price level is 8 crowns/bushel. (a) What is the nominal exchange rate? (b) If the government wants to maintain an official nominal exchange rate of 6 crowns/florin, what must the nominal money supply be? Answers: (a) 4 crowns/florin (b) 20 florins Level of difficulty: 2 Section: 13.5 9. (a) What happens to the fundamental value of a country’s exchange rate when it raises its money supply in a fixed-exchange-rate system? Does this make the currency overvalued or undervalued if originally the official rate equaled the fundamental value? (b) What happens to the fundamental value of a country’s exchange rate when the foreign country raises its money supply? Does this make the currency overvalued or undervalued if originally the official rate equaled the fundamental value? (c) So, if a country wants to maintain its official rate equal to its fundamental value, what must it do when the foreign country raises its money supply? What happens to inflation? Answers: (a) Fundamental value falls below the official rate, so the currency is overvalued. (b) Fundamental value increases above the official rate, so the currency is undervalued. (c) The country must raise its money supply. This leads to inflation worldwide. Level of difficulty: 3 Section: 13.5 10. Describe how the euro was created. What are the benefits of the monetary union? What are the costs? Answers: The European countries unified their currencies to reduce the costs of trading goods and assets. This is beneficial as it reduces transactions costs and because the European economy would rival that of the United States in scope and wealth. The potential costs are that there may be political conflict if countries disagree about monetary policy, or if inflation isn’t as stable or low as some countries desire. Level of difficulty: 1 Section: 13.5
1 Macroeconomics, 6e (Abel et al.)Chapter 15Government Spending and Its Financing15.1 The Government Budget: Some Facts and Figures1) Subtracting government investment from government purchases gives us the amount of governmentA) outlays.B) primary expenditures.C) secondary spending.D) consumption expenditures.Answer: DDiff: 1Topic: Section 15.1Question Status: New

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