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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?

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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pls answer question 10 only, thanks

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?
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?
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