What is a model? Can you think of a model that you might use in your everyday life?
What will be an ideal response?
A model is a description of some aspect of the economic world. It includes only those features that are necessary to understand the issue under study. An economic model is designed to reflect those aspects of the world that are relevant to the user of the model and ignore the aspects that are irrelevant. A typical model is a GPS map. It reflects only those aspects of the real world that are relevant in assisting the user in reaching his or her destination and avoids using information irrelevant to travel.
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Refer to Figure 26-15. In the figure above, suppose the economy in Year 1 is at point A and is expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?
A) sell Treasury bills B) decrease the required-reserve ratio C) buy Treasury bills D) decrease income taxes
Explain why the interest parity condition must hold if the foreign exchange market is in equilibrium
What will be an ideal response?