Assume a free-floating exchange rate. Draw a diagram like Figure 25.6, only this time show an initial
Question:
Assume a free-floating exchange rate. Draw a diagram like Figure 25.6, only this time show an initial equilibrium national income with a balance of payments surplus.
(a) Mark the size of the surplus.
(b) Show the resulting shifts in the (X–M) and the E curves.
(c) Mark the eventual equilibrium.
(d) Show the size of the income and substitution effects (of the change in the exchange rate).
(e) Under what circumstances will the income effect be (i) ‘desirable’; (ii) ‘undesirable’?
(f) Could the income effect of the change in the exchange rate ever be larger than the substitution effect?
Exchange RateThe value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
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Equilibrium national income is where Y E Thus with the initial expenditure curve being given by E 1 in Diagram 251 below equilibrium national income i...View the full answer
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