Explain the essential difference between fixed and flexible exchange rate systems
Fixed exchange rates involve an official act by government officials to fix and peg its currency to all other
currencies. This means that the government must stand ready to buy or sell its own currency in exchange
for foreign currencies. Flexible exchange rates are established by the free interaction of demand and supply.
The government has no role to play in establishing the exchange rate between its currency and that of any
other nation. Exchange rates appreciate and depreciate entirely in accordance with free market forces.
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According to the quantity theory of money:
A) when the gap between the growth rate of money supply and the growth rate of real GDP widens, inflation decreases. B) when the gap between the growth rate of money supply and the growth rate of real GDP widens, inflation increases. C) when the gap between the growth rate of money supply and the growth rate of real GDP widens, nominal interest rates decrease. D) when the gap between the growth rate of money supply and the growth rate of real GDP widens, real interest rates increase.
Answer the following statement(s) true (T) or false (F)
1. In a model that analyzes the effects of a tax change, the tax serves as an endogenous variable. 2. The embarrassment theory suggests why shopping carts should be smaller. 3. An economic model, even if unrealistic, is useful as long as it makes predictions that are realistic. 4. Efficiency is the only criterion by which economists judge policies. 5. All points on a risk-neutral individual's indifference curve have the same expected value.