Macroeconomics Study Set 47
Quiz 20 :
Output, the Interest Rate and the Exchange Rate
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Q30 Q30 Q30
Suppose there are two countries that are identical in every way with the following exception. Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible exchange rate regime. Suppose taxes are increased in both countries and rise by the same amount. Given this information, we know that:
Q56 Q56 Q56
Assume that policy makers are pursuing a fixed exchange rate regime. Now suppose that the foreign interest rate increases. Discuss what policy makers must do to maintain the pegged exchange rate. Also discuss what effect this will have on domestic output and net exports.