Assume that a fixed exchange rate is overvalued. Describe the situation of a speculative crisis against this currency. What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?
What will be an ideal response?
When the speculative attack begins, the expected depreciation of the domestic currency increases substantially, decreasing the demand for domestic assets. Contractionary monetary policy is needed to increase domestic interest rates enough to defend the currency. The cost to the central bank in terms of the costs of intervention and the contractionary effect on the economy may make devaluation preferable.
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If MPC = 2/3, a decrease in government purchases of $10 billion will ultimately lead to:
a. a $30 billion increase in aggregate demand. b. a $10 billion increase in aggregate demand. c. a $10 billion decrease in aggregate demand. d. a $30 billion decrease in aggregate demand.
The figure below illustrates the impact of an export subsidy as imposed by a large country. No imports are permitted.
The cost to the government of the indicated export subsidy is shown by area(s)
A. (a + b + c + d + e + f + g + h + i + j) B. (c + h) C. (b + c + d + f + g + h + i + j) D. (b + c + d)