Part One:
- Nominal exchange rate is the amount of currency (foreign) that can purchase a unit of local currency. Real exchange rate answers the question on the amount of goods of local goods and services that can be exchanged for other goods and services in another country. Nominal deals with money while real deals with money in kind.
- Twin deficit is a double deficit of both the fiscal and the current account.Both deficits can be related because when the country imports more than it exports,it means it will have less income and so endup using more than it had budgeted for thus leading to fiscal deficit.On the other hand the two can fail to be related because the government can export more than imports and happens to have no current account deficit but the income from the exports happens to be misused by afew and thus the government endsinto a fiscal deficit.
- Overshooting in exchange rate occurs during shortrun and it an excessive fluctuation in exchange rates which happen in response of monetary policy and it is caused by prices being sticky.
- Tarrifs will have a negative impact on the real exchange rate because they will always increase the price of the product that is being imported.this will make less people to be attracted to the imported goods and thus encouraging consumption of locally produced goods.
Part Two:
6.a
7.d
8.a
9 c
10.a
11.d
12.a
13.e
14.a
15.a
Part Three:
16.in a fixed exchange rate regime,the value of currency of a country is fixed by a monetary authority.The reason why the fiscal policies are more effective in a fixed rate regime is because their effects are quicker and they are able to direct the spendings of the government where they are required urgently.through the fiscal policy,the central bank will purchase more foreigh assets and thus increase money supply.
17.a falling nominal interest will be associated with a depreciating currency because when a countries intrests rates are low,foreign investors will not be interested in investing in that country and that will lower the demand and the value of the currency locally.However,this is not the case with monetary models where falling interest rates are associated with appreciating currency because in monetary models the currency depreciates with the growth of money
18.monetary policy becomes ineffective for a country country cought in liquidty trap because at this point the interest rates are very low and the individual are preferring to save rather than investing in things like investments.