2014 macro 3 essay test review Compatibility Mode Layout Ref

2014 macro 3 essay test review- Compatibility Mode Layout Ref View Review for Exam 3- Macroeconomics Peggy Sueppel 1. Define foreign currency 2. Distinguish between appreciation and depreciation of the dollan. 3. What are the factors that can change the demand for U.S. dollars in the foreign exchange market? 4. Explain the difference between flexible exchange rate policy, fixed exchange rate policy and a crawling peg exchange rate policy What events/situations can cause the long run AS curve to shift? The short-run AS curve to shift? Explain the relationship of real GDP to Potential GDP in a recessionary gap and an inflationary gap. 6. 7, List 5 events that could cause Demand-Pull Inflation.

Solution

1. Foreign currency is the currency of other countries. Foreign currency is not an absolute term but relatable as for example, dollar is foreign currency for India and, rupees is foreign currency for America.

2. In floating exchange rates system, this scenario of currency appreciation and depreciation takes place. In floating exchange rate system, no currency has fixed defined value for one another (for eg ?1=$1, always), but it keeps on changing as driven by market forces.

Currency appreciation or here in this case, appreciation of dollar will take place when it\'s value will increase, with respect to one or more countries. And it\'s depreciation will take place when it\'s value will decrease with respect to one or more countries.

3) factors that can change demand for dollar are:-

1) reduction in the interest rate by fed in USA.

2) rise in the demand for consumer spending in USA.
3) rise in uncertainty about future and future and it\'s opportunities in USA.
4) rise in transaction costs (due to different currencies) to buy and sell stocks and bonds.

5) A rise in inflation will lead to rise in the nominal money demand.

4. A fixed exchange rate is a system in which nominal exchange rate is set strictly by the monetary authority of any country with respect to a basket of foreign currencies.

A floating exchange rates fluctuates constantly as its value fluctuate with market forces of demand and supply, in foreign exchange markets.

In crawling peg exchange rate system, fluctuation in a fixed exchange rate is allowed under a band of rates.

5.Long run AS shift can be caused by:-
1)Improvements in productivity and efficiency
2) increase in the stock of capital and labour resources.

Short run AS shift can be caused by:-
1) inflation
2) fluctuation in govt expenditure
3) fluctuation in interest rates.

6. If real GDP < potential real GDP ,then a recessionary gap exists.

If real GDP > potential real GDP, then an inflationary gap exists.

7.
1) increase in consumption

2) depreciation in currency exchange rate.

3) increase in government spending

4) expectations of rise in inflation.

5) monetary growth.