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Q2. Home signs a free-trade agreement with Foreign, which lowers tariffs and other barriers to trade. Both countries are very similar in terms of economic shocks, as they each produce very similar goods. Use the graph to discuss the following questions- Symmetry of shocks FIX Market Integration a. Initially, trade rises. Does the rise in trade make Home more or less likely to peg its currency to Foreign's currency? Why? b. In the longer run, freer trade causes the countries to follow their comparative advantage and specialize in producing very different types of goods which can experience difference production shocks. Does the rise in specialization make Home more or less likely to peg its currency to the foreign currency? Why?

Q2. Home signs a free-trade agreement with Foreign, which lowers tariffs and other barriers to trade. Both countries are very similar in terms of economic shocks, as they each produce very similar goods. Use the graph to discuss the following questions- Symmetry of shocks FIX Market Integration a. Initially, trade rises. Does the rise in trade make Home more or less likely to peg its currency to Foreign's currency? Why? b. In the longer run, freer trade causes the countries to follow their comparative advantage and specialize in producing very different types of goods which can experience difference production shocks. Does the rise in specialization make Home more or less likely to peg its currency to the foreign currency? Why?

Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter29: Exchange Rates And International Capital Flows
Section: Chapter Questions
Problem 25CTQ: If a countrys currency is expected to appreciate in value, what would you think will be the impact...
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Q2. Home signs a free-trade agreement with Foreign, which lowers tariffs and other barriers to trade. Both countries are very similar in terms of economic shocks, as they each produce very similar goods. Use the graph to discuss the following questions- Symmetry of shocks FIX Market Integration a. Initially, trade rises. Does the rise in trade make Home more or less likely to peg its currency to Foreign's currency? Why? b. In the longer run, freer trade causes the countries to follow their comparative advantage and specialize in producing very different types of goods which can experience difference production shocks. Does the rise in specialization make Home more or less likely to peg its currency to the foreign currency? Why?
Transcribed Image Text:Q2. Home signs a free-trade agreement with Foreign, which lowers tariffs and other barriers to trade. Both countries are very similar in terms of economic shocks, as they each produce very similar goods. Use the graph to discuss the following questions- Symmetry of shocks FIX Market Integration a. Initially, trade rises. Does the rise in trade make Home more or less likely to peg its currency to Foreign's currency? Why? b. In the longer run, freer trade causes the countries to follow their comparative advantage and specialize in producing very different types of goods which can experience difference production shocks. Does the rise in specialization make Home more or less likely to peg its currency to the foreign currency? Why?
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