Answered: Trinidad and Kenya are trading…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Trinidad and Kenya are trading partners. The Kenyan economy is operating at full employment, and Kenya's current account balance is zero.

A. Assume the exchange rate between the Trinidadian dollar (TD) and the Kenyan shilling (KS) changes from 1TD=82KS to 1TD=65KS. Does the KS appreciate or depreciate against the TD?

B. Given your answer in Part A, will each of the following increase, decrease, or remain the same?

i. The price of Kenyan goods in Trinidadian dollars

ii. Kenya's net exports.

C. Draw a single correctly labeled graph with the long run Phillips curve for Kenya. On the graph, show the new short run equilibrium as a result of the change in Kenya's net exports from Part Bii, labeled point X.

D. Given your answer in Part Bii, will each of the following be in deficit, surplus, or zero for Kenya?

i. Current account balance

ii. Financial (capital) account balance

Definition Definition Relationship between the rate of unemployment and the rate of inflation that shows that the lower the initial rate of unemployment, the greater the rise in wage rate corresponding to a given rise in the rate of unemployment. The Phillips curve assumes that the ratio between prices and nominal wage rates is constant in the short run. Presented graphically, the Phillips curve shows an inverse relationship between the rate of unemployment and the rate of inflation.

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