Chapter 8R, Problem 3FRQ

a)

To determine

The graph of AD, SRAS, and LRAS that shows the equilibrium output and price level, labeled by Q₁ and PL₁ respectively, and the long run output as Q_f.

Explanation of Solution

The graph of the foreign exchange market that shows the effect on the value of YD would be shown as:

  

This graph shows the real GDP of the economy on the horizontal axis and the price on the vertical axis.

1. In this graph PL₁ is the equilibrium price where demand and supply are equal and the equilibrium quantity is labeled by Q_1.
2. Here, the long-run output is labeled with Q_f

Economics Concept Introduction

Introduction: A global decentralized market for trading currencies is known as the foreign exchange market and for every currency, the foreign exchange rates are set by this market.

b)

To determine

The effect of an expansionary fiscal policy on graph.

Explanation of Solution

  

Tax reductions, refunds, greater public investment, etc. all come under the expansionary fiscal policy that might boost discretionary government expenditure, injecting additional cash into the economy via government contracts. In this case, applying fiscal policy which is expansionary shifts the demand to the right or upward which also helps to remove recession in the economy.

Economics Concept Introduction

Introduction: A global decentralized market for trading currencies is known as the foreign exchange market and for every currency, the foreign exchange rates are set by this market.

c)

To determine

The graph of the foreign exchange market for the country’s currency (mina), relative to the country U dollar.

Explanation of Solution

The graph of the foreign exchange market shows the effect on the market for the country’s currency (mina) in relation to the U dollar where r is the foreign exchange rate and q is the quantity of dollars

In this graph, the foreign exchange of mina is shown on the vertical axis and the number of dollars on the horizontal axis which means the value of a currency is influenced by supply for it rather than demand. A currency's exchange value rises in direct proportion to the level of supply. On the other hand, as a currency's supply declines, its value also declines.

Economics Concept Introduction

Introduction: A global decentralized market for trading currencies is known as the foreign exchange market and for every currency, the foreign exchange rates are set by this market.

d)

To determine

How the value of the currency (mina) can be affected by the change in output?

Explanation of Solution

With the change in output or quantity, the exchange rate of mina is also affected as its supply of currency shifts to the right which shows an increase in supply increase in the foreign rate of the currency. Whereas, a decrease in the supply will diminish the rate of currency in the market. This happens because the supply of currency has a positive impact on currency mina.

Economics Concept Introduction

Introduction: A global decentralized market for trading currencies is known as the foreign exchange market and for every currency, the foreign exchange rates are set by this market.