"Under floating rates, the economy is more vulnerable to shocks coming from the domestic money market." Discuss
What will be an ideal response?
The statement is true. Under floating rates, a rise in real domestic money demand causes income to fall and to an appreciation of the domestic currency. If the rise in real domestic money supply is permanent, it will lead eventually to a fall in the home price level.
Under a fixed exchange rate, the change in real money demand does not affect the economy at all. To prevent the home currency from appreciating, the central bank buys foreign reserves with domestic money until the real money supply rises by an amount equal to the rise in real money demand. This intervention has the effect of preventing any change in output or the price level.
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According to the demand-pull theory, what is responsible for inflation?
(A) Demand for goods and services exceeds existing supply. (B) Too much money is in circulation. (C) Producers raise prices to meet increased costs. (D) The economy is in a wage-price spiral.
Which statement is correct?
A. The operation of a market system has little, if any, effect on the distribution of income in the economy. B. In a market system, buyers and sellers must be in face-to-face contact with each other. C. Prices affect the distribution of goods in a market system but not the allocation of resources. D. In a market system, prices serve to ration goods and services to consumers.