StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...

Macroeconomics. A fixed exchange rate - Essay Example

Comments (0) Cite this document
Summary
2. Derive the classical aggregate supply curve and set out what would happen to money wages, real wages, employment, prices and output if there was a rise in the money supply. Explain the importance of the assumption that labour demand is elastic to the classical notion that a cut in money wages would stimulate output and employment. 3
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER97% of users find it useful
Macroeconomics. A fixed exchange rate
Read TextPreview

Extract of sample "Macroeconomics. A fixed exchange rate"

Download file to see previous pages 5. Using the closed economy IS-LM model, show how falls in business and consumer confidence can precipitate a deep and prolonged recession. Set out what Keynes meant when he advocated fiscal policy to solve the problem. 10
6. By what means may the monetary authorities maintain a fixed exchange rate Outline how devaluation may help a country experiencing difficulties under a fixed exchange rate regime and set out circumstances under which devaluation makes things worse. 13
The Keynes and Pigou effects can be understood in the context of the impact of a change in the money supply on consumption. The economists Keynes and Pigou studied the effects of a fall in wages and prices on real aggregate demand and attempted to determine what underlies the closed-economy AD curve.
Keynes maintained that a fall in money wages and price levels would reduce the demand for money and result in a fall in interest rates, thereby taking the economy to full employment. This is known as the Keynes effect. This takes place, he explained, in a situation where the money supply is constant because a fall in price levels would increase the real money supply. ...
rence between money supply and real money supply We define the money supply as the quantity of money supplied by the central bank and then assume that it is constant or unchanged for different price levels. However, if the money supply (represented by the variable M) is constant while the price level (P) falls, the real money supply (represented by the fraction M/P) increases. Therefore, a fall in P at constant M raises M/P, the real money supply that in effect represents the "value" of M, shifting the upward sloping L-M curve to the right, with effects that are analogous to those of an increase in M.
Increasing M has the effect of bringing the interest rate down, generating a rise in investment spending. Businesses will expand to increase production, employment will rise, and so would output and consumption. The effect would be small (that is, the AD curve is steep) if either (a) the L-M curve is quite flat so that the fall in the interest rate is small, or (b) the downward sloping I-S curve is steep, so that falls in interest rate will have little effect on spending. In standard textbooks, the derivation of the closed economy aggregate demand (AD) curve relies entirely on the Keynes effect.
Pigou studied the same phenomenon and maintained that lower prices would encourage consumption, thereby boosting total income and employment. This is known as the Pigou effect. Like Keynes, he observed that a fall in prices would raise the real money supply (M/P), which raises wealth and stimulates a rise in consumption. This shifts the I-S curve to the right. The Pigou effect is largest when the Keynes effect is smallest (that is, the L-M curve flat and the I-S curve steep). This phenomenon, also known as the real balance effect, is based on the assumption that part of ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Macroeconomics. A fixed exchange rate Essay Example | Topics and Well Written Essays - 3750 words”, n.d.)
Macroeconomics. A fixed exchange rate Essay Example | Topics and Well Written Essays - 3750 words. Retrieved from https://studentshare.org/miscellaneous/1528911-macroeconomics-a-fixed-exchange-rate
(Macroeconomics. A Fixed Exchange Rate Essay Example | Topics and Well Written Essays - 3750 Words)
Macroeconomics. A Fixed Exchange Rate Essay Example | Topics and Well Written Essays - 3750 Words. https://studentshare.org/miscellaneous/1528911-macroeconomics-a-fixed-exchange-rate.
“Macroeconomics. A Fixed Exchange Rate Essay Example | Topics and Well Written Essays - 3750 Words”, n.d. https://studentshare.org/miscellaneous/1528911-macroeconomics-a-fixed-exchange-rate.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Macroeconomics. A fixed exchange rate

Determination of Exchange Rate

... rate policy was dominated by the Breton Woods agreement that was signed in 1944 between 1946 and 1973. Through this pact, countries agreed to commit themselves to convertible currencies that could be converted to the current account and the fixed exchange rate (Chinn and Hiro, 2005, p. 301). The pact enhanced eschew of exchange controls and fixing the exchange rates due to the negative lessons that were experienced after the world war (Bagella, et al. 2006, p. 1152). Despite the increased application and use of the Breton Woods pact, Kenen (2000, p. 111) posits that the arrangement was strained since the 1960s and in 1973, fixation of exchange rates was officially abandoned by most countries in Europe and Japan thereby ushering in the next...
16 Pages(4000 words)Coursework

China's Monetary Policy, From Fixed to Managed Exchange Rate

As of the last quarter of 2010, the economy of China was reported to overheat when its gross domestic product (GDP) increased by 10.3% as compared to the previous year (Simpkins 2011). In response to the on-going global financial crisis, the Chinese government decided to implement a “moderately loose monetary policy” from the usual “prudent monetary policy” as a strategic move in stabilizing the overall economic condition in China (Pierson 2010; Yang 2010). Based on the standard economic practice, a tight monetary policy is normally implemented by the central bank in order to control the economic consequences associated with high inflation rate. To allow the readers have a better understanding about this particular research topic...
7 Pages(1750 words)Essay

Macroeconomics Inflation and Unemployment Exchange Rate and Open Economy

... and supply in an open economy helps to check against inflation. This happens because when there are job seekers, there are people seeking to employ. 26-8 Fixed rate exchange is used to value a country currency against other countries currencies. The government through central bank interventions fixes and maintains the exchange rate. On the other hand, a flexible exchange rate is not maintained by the central bank, instead free market forces of supply and demand set the rates of currency exchange in an open economy. It is ‘self regulating’ because when the demand of a currency is low the value goes down; when the demand is high the value goes up making it cheap to import goods and services (Smith, 2003). The central bank however has...
3 Pages(750 words)Term Paper

A Fixed Exchange Rate Regime

...1. As the foreign price level increases, the aggregate demand for domestic currency increases as the foreign goods become more expensive. People would rather buy domestic goods than foreign goods. Under a floating exchange rate regime, as shown in figure 1, the aggregate demand curve for domestic currency shifts from D0 to D1, causing the exchange rate (e) to move from e0 to e1 accordingly. Therefore, the exchange rate would decrease when the foreign price level increases. The domestic price level would remain unchanged. Under a fixed exchange rate regime, however, the exchange rate (e) is fixed, as shown in Figure 2. Therefore, as the aggregate demand for domestic currency increases, the aggregate supply of domestic currency must also...
1 Pages(250 words)Essay

Floating and Fixed Exchange Rate Regimes

...Running Head: FLOATING AGAINST FIXED EXCHANGE RATE REGIME Floating Against Fixed Exchange Rate Regime of Institution] Floating against Fixed Exchange Rate Regime using the Mundell-Fleming and the Dornbusch Models Introduction As part of the financial improvement and stabilization programs, a lot of Latin American countries in the history decade adopted a variety of forms of fixed exchange rate regimes and opened their assets account. The fixed exchange rate machine is used as a supposed fastens to manage chronically price rises and the freedom of possessions mobility is permissible to endorse economic growth. These schemes have achieved at least some achievement as numerous countries in the area have experienced financial...
4 Pages(1000 words)Essay

Exchange Rate Risk

... Company took out its loan, its choice of a fixed interest rate was an attempt to avoid great interest rate risk, as interest rates were rising. Now that the financial advisor and others believe that the interest rate is falling, howerver, and interest rate swap is beginning to look beneficial. A company uses an interest rate swap when it exchanges its interest rate for that of another party. By swapping interest rates, companies allow themselves some freedom from climbing interest rates. In order to determine whether or not an interest rate swap is beneficial, however, the zero-coupon bonds calculations must be performed. If interest is compounded annually, using the rate of returns formula, interest rates for zero-coupon bonds...
5 Pages(1250 words)Assignment

Exchange Rate Regimes

...Exchange Rate Regimes Introduction The impact of the inherent volatility and unpredictability of exchange rates on macroeconomic conditions is central to the debate about fixed and flexible exchange rates. Real exchange rates are defined as nominal rates adjusted for price levels. Since prices for individual countries, when expressed in a common currency, are subject to the variability of exchange rates, bilateral real exchange rates based on individual-country price levels may be infected with measurement errors. The use of one reference country, such as the USA, gives rise to asymmetries. By definition, the exchange rate is a relative price of two assets and, like other asset prices, is determined in a forward-looking manner...
9 Pages(2250 words)Essay

Fixed vs. Floating exchange rates

Fixed vs. Floating exchange rates In a nutshell, an exchange rate refers to the price in one nation’s currency of one unit of another nation’s currency. Ever since the collapse of the Bretton Woods regime (soft peg) in the 1970’s, economists have never concluded the debate whether fixed or floating exchange rates are preferable. In my opinion, foreign exchange rates are crucial promoting international transactions while ensuring adjustments to disequilibrium and shocks. In effect, there are 2 systems of exchange rates i.e. fixed exchange rate regime as well as floating exchange rate regime. In fact, a country can only adopt only one of the two foreign exchange rate regimes. What is more, there are two types of fixed exchange rate...
2 Pages(500 words)Essay

Exchange Rate

...Exchange Rate Risk al Affiliation) Introduction Kerr conducts business in the international market. Conducting business in the international market may involve dealing with foreign currencies, which exposes a company to risks associated with the foreign currencies (Jacque & Jacque, 1996). Kerr Inc. will lose money if the exchange rate between the U.S dollar and the Japanese Yen fluctuates negatively during the course of a transaction. In order for Kerr Inc. to mitigate the adverse fluctuations in the foreign exchange market, the company should manage the foreign exchange risk. The company can manage the foreign exchange risk by employing the following measures: Foreign exchange contracts Kerr Inc. may reduce its economic exposure...
1 Pages(250 words)Assignment

The Importance of Exchange Rates Regimes for Trade

... in emerging economies. Edward’s paper draws on lessons learned during the 1990s, and deals with some of the most important policy controversies that emerged after Mexican, Asian, Russian and Brazilian crises. Two of these exchange rate lessons from the 1990s currency crises can be summarized into the following12: Nominal Anchors and Exchange Rates. In the late 1980s and early 1990s, and after a period of relative disfavor, rigid nominal exchange rates made a comeback in policy and academic circles. Based on time-consistency and political economy arguments, a number of authors argued that fixed, or predetermined, nominal exchange rates provided an effective device for guiding a disinflation program, and for maintaining macroeconomic...
10 Pages(2500 words)Assignment

Currency Exchange as a Key Instrument of International Commerce

The globalization movement created a greater need to determine the equivalent valuation of monetary units also referred to as the exchange rate in order to execute a trade of goods among nations. Currency exchange is the trade value of one unit of currency into another currency which is required to facilitate the trade of goods and services among nations. For example, as of January 9, 2008, the currency exchange market value of one Euro was 1.47 US dollars (Yahoo, 2008). The exchange is a market mechanism that is very instrumental in the monetary policy of the nation. Both the developing nations and a developed nation must instill a sound monetary unit strategy to create a stable currency that is both liquid and valuable in the ma...
10 Pages(2500 words)Term Paper

Different Models of Exchange Rate Determination and Their Empirical Support

Specifically, some of the discussed models of exchange rate determination are the balance of payment approach model, the monetarist or asset approach model, and the martingale-random walk model. Moreover, the paper will also integrate the experiential observations and examples during the paper, in order to understand the practicality of these models.

Under the balance of payment approach, the domestic cost of foreign currency is established like the cost of any other article of trade. In other words, the market demand and supply curvatures are intersected in the exchange market for that particular foreign currency. The modeling of the abovementioned approach related to the demand and supply for foreign exchange is quite...
13 Pages(3250 words)Term Paper

Exchange Rate Policy in the Gulf States

Recently, due to shocks in oil prices, many Gulf States have been pursued to adapt to the flexible exchange rate regimes because of rising inflationary pressures as well as bringing in more structural reforms into such economies in order to improve their long term sustainability. (Times, 2007). Further, many analysts are also indicating the recent movements in the oil price as one of the most critical reasons for bringing in the changes into the exchange rate regimes in GCC countries as most of the OPEC members believe that the mismanagement of US economy and weakening dollar against major currencies of the world is a cause of concerns as revenues continue to dwindle despite maintaining adequate supply in the market. (Feldman, 200...
6 Pages(1500 words)Literature review

Developing a Strategy to Enhance Workplace Learning in Workplace at Travelex Foreign Exchange

As earlier stated, I have chosen to answer Option No. 1 which is about drafting and crafting a strategic plan which can be implemented in my workplace as a learning workplace on the basis of its analysis and identification made in the earlier assignments. As also required, the initial paragraph, following this, makes a brief review of what has been done in Assignments 1 and 2. Since as a Training Coordinator, my job entails the induction, training and assessment of the progress of the new hires, I have focused my answer to these three areas and divided the paper into Induction and Training, and; Assessment/Evaluation.

The first assignment was about the physical and social environments of the workplace and in that assign...
8 Pages(2000 words)Assignment

Macroeconomics and Trade Policys

Keynes argued that prices and wages do not determine the level of employment, as many classical economists suggested, but instead the level of aggregate demand for goods and services (Case & Fair 683). Keynes realized as well during the Great Depression that the government could intervene in the economy to attain specific employment and output goals by either increasing or decreasing taxes and government spending.

For example, raising taxes will decrease the disposable income of households and thus effectively decreasing consumption. When the government decreases consumption, the household demand for goods and services decreases thus it would only seem reasonable that the amount of output that the economy would also...
7 Pages(1750 words)Article

What Is Macroeconomics

While microeconomics is concerned with the factors underpinning the economic life of individual entities like families and small businesses, macroeconomics looks into the various elements that move or determine the economy in its entirety or what some call an aggregate economy. Macroeconomics is useful because it allows a predictive view of how market forces affect the economy and advises governments appropriate economic policies and gives private individuals and business entities a glimpse of what the future holds economically.
The term macroeconomics did not exist prior to the Great Depression but there was a collective set of theories that were used to study the various workings that influenced the aggregate economy. Econo...
8 Pages(2000 words)Assignment

Intermediate Macroeconomics and Macroeconomic Coordination

..., in case of “APE < GDP = ASF”, the GDP decreases and causes the interest rates to decline. CHAPTER 05 ( MACROECONOMIC SHOCKS: EXCESS DEMAND CASES) Macroeconomics shock cause a disruption between macroeconomic variables and makes them unequal thus unsettling the economy. Here we will elucidate the cases macroeconomic shocks pertaining to an excessive demand. There are generally three cases of excessive demand caused shock in the macroeconomic coordination process but we will be discussing two of them in our précis. First case is of an increase in APE. This rise in demand may be due to increase in domestic or foreign demand in the economy. The increase in demand due to rise in APE can be explained from the above graph. The APE line...
6 Pages(1500 words)Assignment

Exchange Rate Regimes

... rate regime basically depends on the fiscal/monetary policy mix of a particular country and the exchange rate is determined by the central bank of the country. The basic types of exchange rate regimes are the fixed exchange rate and the floating exchange rate. In the latter case the market decides the movements of the exchange rate. Exchange rate volatility is a common denominator of a country’s exposure to international risk through foreign transactions, whether international trade or investment (Madura, 2009). The higher the degree of exposure the higher the degree of risk associated with such exposure. Thus the exchange rate can be considered as an important indicator in monetary policy and it mainly depends on the monetary policy...
14 Pages(3500 words)Term Paper

The Causes of High Crime Rate and its Solutions

...Persuasive Paper Part 2: Solution and Advantages al Affiliation) Part Revision of a Problem Exists Introduction The crime rates have been on the rising trend for a long time now. Criminal activities have been named as among the major problems facing the society in today’s world. The government has been steadfast in fighting the various forms of crimes. Although, there have been some notable achievements in this campaign, it is clear that a lot have to be done to bring the vice to the lowest levels. Apparently, a number of issues are allegedly caused by the increased crime rates. These problems includes increased public burden, increased expenses and cost to the society, the need to involve so many parties to resolve the vice, and the need...
7 Pages(1750 words)Term Paper

What Can Be Done to Reduce the Rate of Global Warming

Global warming is because of heat emissions from the global consumption of non-renewable energy since early 1880. The sum of non-renewable energy consumption has been debauched into the heat of which a small part has been emitted to space. Therefore, the remaining heat can be indicated as global warming.
However, man has been reported to be nature’s worst enemy and the best promise at the same time. That is; for progress and pollution go hand in hand, there will be no justified end to growth, and consequently, there will be no end or escape from corruption. Therefore, pollution is just direct or indirect discharge of energy or substance by man into aquatic surroundings contributing to the unhealthy situation to human b...
10 Pages(2500 words)Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Macroeconomics. A fixed exchange rate for FREE!

Contact Us