lecture 8

Question 1

domestic absorption

Answer 1

total spending by home agents on C,I and G irrespective of the origin of the goods or services. Abs = C + I + G

Question 2

nominal exchange rate

Answer 2

the rate at which one person can trade the currency of one country for the currency of another.

Question 3

real exchange rate

Answer 3

a measure of price competitiveness.

Question 4

floating exchange rate

Answer 4

fully flexible. no intervention in the forex market. exchange rate is determined by supply and demand. a fall in money demand lowers the interest rate at home, and leads to a depreciation of the home exchange rate without intervention.

Question 5

fixed exchange rate

Answer 5

government sets a peg at which it will buy or sell foreign currency using foreign exchange reserves in order to keep prices fixed. expecting downwards pressure on interest rates, the central bank will intervene to buy home money, leading to a decline in money supply to meet demand. interest rates and exchange rates remain unchanged.