Suppose that we are in a country Localia, again trading LCL as our currency. We are still trading with Nearovia and their Nearos. Suppose also that Localia begins at its long-term equilibrium level of Real GDP. Now suppose that Localia experiences an increased in its autonomous desired investment. 7. If Localia was a closed economy, what would we expect to happen to its Real GDP and the price level in the short-run? Explain using the AD-AS figure. 8. Suppose instead that Localia is an open economy, that trades both goods and assets with Nearovia, and the LCL-NER exchange rate is a flexible exchange rate. What happens to the short-run Real GDP and price level now? Does this flexible exchange rate have a stabilizing or de-stabilizing effect on Real GDP relative to your answer in Q7? Explain using the AD-AS figure. 9. Finally, Suppose instead that the LCL-NER exchange rate is a fixed exchange rate instead, maintained by the Localia Central Bank. Does this fixed exchange rate have a stabilizing or de-stabilizing effect on Real GDP relative to your answers in Q7 or Q8? Explain using the AD-AS figure. 10. In the case of this fixed exchange rate, what action does the Central Bank of Localia need to take to maintain the fixed rate in this example?
Suppose that we are in a country Localia, again trading LCL as our currency. We are still trading with Nearovia and their Nearos. Suppose also that Localia begins at its long-term equilibrium level of Real GDP. Now suppose that Localia experiences an increased in its autonomous desired investment. 7. If Localia was a closed economy, what would we expect to happen to its Real GDP and the price level in the short-run? Explain using the AD-AS figure. 8. Suppose instead that Localia is an open economy, that trades both goods and assets with Nearovia, and the LCL-NER exchange rate is a flexible exchange rate. What happens to the short-run Real GDP and price level now? Does this flexible exchange rate have a stabilizing or de-stabilizing effect on Real GDP relative to your answer in Q7? Explain using the AD-AS figure. 9. Finally, Suppose instead that the LCL-NER exchange rate is a fixed exchange rate instead, maintained by the Localia Central Bank. Does this fixed exchange rate have a stabilizing or de-stabilizing effect on Real GDP relative to your answers in Q7 or Q8? Explain using the AD-AS figure. 10. In the case of this fixed exchange rate, what action does the Central Bank of Localia need to take to maintain the fixed rate in this example?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
do only question 9
Transcribed Image Text:Suppose that we are in a country Localia, again trading LCL as our currency. We are still trading
with Nearovia and their Nearos.
Suppose also that Localia begins at its long-term equilibrium level of Real GDP. Now suppose
that Localia experiences an increased in its autonomous desired investment.
7. If Localia was a closed economy, what would we expect to happen to its Real GDP and
the price level in the short-run? Explain using the AD-AS figure.
8. Suppose instead that Localia is an open economy, that trades both goods and assets with
Nearovia, and the LCL-NER exchange rate is a flexible exchange rate. What happens to
the short-run Real GDP and price level now? Does this flexible exchange rate have a
stabilizing or de-stabilizing effect on Real GDP relative to your answer in Q7? Explain
using the AD-AS figure.
9. Finally, Suppose instead that the LCL-NER exchange rate is a fixed exchange rate instead,
maintained by the Localia Central Bank. Does this fixed exchange rate have a stabilizing
or de-stabilizing effect on Real GDP relative to your answers in Q7 or Q8? Explain using
the AD-AS figure.
10. In the case of this fixed exchange rate, what action does the Central Bank of Localia need
to take to maintain the fixed rate in this example?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education