II$.$ Automatic Adjustment with Fixed and Flexible Exchange Rates $(9$ points$)$

$1.$ How does the adjustment mechanism operate under a gold standard? $(1$ point$)$

$2.$ What does a J curve refer to$,$ and how does it arise? $(1$ point$)$

$3.$ Suppose that M $=0\mathrm{.}75$ and X $=0\mathrm{.}5$ for a given country: $(2$ points$)$

a$.$ Are import demands elastic or inelastic in this case?

b$.$ Does the Marshall$-$Lerner condition hold? How do we know?

c$.$ Suppose that the domestic price of this country$$s import rise by $10$ percent

following a depreciation of the currency. What will happen to the quantity that it

imports?

d$.$ Suppose that the foreign currency price of this country$$s export price falls by $10$

percent following a depreciation. What will happen to the quantity that it exports?

$4.$ Suppose that a nation is at full employment without inflation but has a current

account deficit in its balance of payments. $($a$)$ Explain why a depreciation of the

nation$$s currency will not correct the deficit unless real output rises or domestic

expenditures $($absorption$)$ fall. $($b$)$ How can the nation$$s output rise as a result of the

depreciation? $($c$)$ How can domestic absorption fall automatically as a result of the

depreciation? $($d$)$ How can the government help reduce domestic absorption and make

the devaluation effective? $(2$ points$)$