Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 14, Problem 1RQ
To determine
Financial frictions and how they enter in the IS/MP and AD/AS model.
Expert Solution & Answer
Explanation of Solution
Disruptions to the financial market are the reason for financial frictions. Financial frictions lead to shortage of liquidity and bankruptcy. The role of financial frictions in the financial crisis is evidenced in increasing spreads in yields between the financial securities.
The financial friction enters into the IS/MP diagram by making changes in the real interest rate. If the financial friction increases, the real interest rate would increase by shifting the MP schedule and reducing the short-run output. In the case of the AD/AS model, the increase in financial friction via increase in the interest rate leads to a leftward shift in the aggregate
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Students have asked these similar questions
The idea that a country can experience gains from trade means that it can
A) consume at a point outside its production possibilities frontier.
B) increase its exports.
C) increase the efficiency of its production.
D) experience a bowed-out production possibilities frontier.
A country is likely to have a comparative advantage in a land-intensive activity if it has a
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Florin and Guilder are two countries separated by a narrow sea. They use currencies called, respectively, the Flop and the Gulp.
Suppose the nominal exchange rate is 20 Flops per Gulp.
A Guilderian trader buys a 120 Flop barrel of Florish pickles by exchanging 6 Gulps, and a Florish trader buys a 4 Gulp crate of Guilderian apples by exchanging 80 Flops.
Then the Gulp depreciates to 10 Flops per Gulp.
Instructions: Enter your answers as whole numbers.
How much must the Guilderian pay for the same 120 Flop barrel of pickles?
Gulps
How much must the Florish trader pay for the same 4 Gulp crate of apples?
Flops
Chapter 14 Solutions
Macroeconomics (Fourth Edition)
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