Spending and the Exchange Rate int the Keynesian Model (See Photo) 2. This quest

Question

Spending and the Exchange Rate int the Keynesian Model (See Photo)

2. This question concerns the relative virtues of the regimes of fixed and floating exchange rates in automatically stabilizing real growth in the economy. Assume that the goal is to minimize Variance (??) in the presence of domestic disturbances ?? and foreign dis- turbances ?? (which are assumed to be independent of each other),The variance is a measure of variability that has the following three properties in general. Variance (au)-a-Variance (11) Variance (b+v)-Variance (v) Variance (u v) Variance (uVariance (v) where a and b are parameters, or exogenous variables, and u and v are independent disturbances. Assume the simple Keynesian model of Section 17.1 aHow does Variance (AY) depend on Variance (AA) and Variance (AX) under fixed exchange rates? ii. Under floating exchange rates? b. Which regime would be preferable if the variance of foreign disturbances is much larger than the variance of domestic disturbances? Which would be preferable if the two kinds of disturbances are similar in magnitude, and the country is very open (m is large)? Which is a better candi date for a fixed exchange rate, Australia or Luxembourg? ii.

Explanation / Answer

a. i) In today's global scenario, any diturbance in foreign market can directly impact the domestic market.

For example - In case of major shut down in an economy leading to non supply of products from that economy . In these cases, the supply of those goods shall be restricted. Which would lead to increase in proces of that product and also lead to certain malpractices.

Domestic disturbances are directly attributable to cause fluctuations in the economy. Like a strike called by transporters may impact supply of products in the domestic market as well as the export of the products.

b.i. Flexible exchange rates insulate the domestic economy form foreign disturbances. Any increase (decrease) in the foreign price level would act to decrease (increase) the exchange rate by the same percentage as the foreign price level changes. As real consumption is independent of the exchange rate, real consumption is invariant to foreign price level disturbances.

The variance of consumption under flexible rates will be greater than the variance of consumption under fixed rates.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.