Question

9. What is real exchange rate? Show how real exchange rate depreciation of a country’s currency can promote CA surplus?

10. What have been the historical roles of IMF, World Bank and WTO? Are these roles changing over time?

11. What is welfare state? What are the main policy dilemmas for welfare state? Has globalization limited the role of a nation in terms of choosing independent policies? Are national governments withering away?

12. What is public debt and what are its implications?

Pls answer all questions, thanks a lot!!

Answer 1

The real exchange rate is defined as the ratio of the price level abroad and the domestic price level. In this, foreign price level is converted into domestic currency units via the current nominal exchange rate. It promotes a CA surplus because :

1. Exports are cheaper. A devaluation of the exchange rate will make exports more competitive and appear cheaper to foreigners. This will increase demand for exports.

2. Imports become more expensive. A devaluation means imports, such as petrol, food etc. will become more expensive. This will reduce demand for imports.

3. Increased aggregate demand (AD). A devaluation could cause higher economic growth. Part of AD is (X-M) therefore higher exports and lower imports should increase AD