Question

Question 1. Answer true or false or uncertain, please explain briefly a) Consider a country that...

Question 1.
Answer true or false or uncertain, please explain briefly

a)
Consider a country that adopts the fixed exchange rate system and uses monetary policy to sustain the fixed exchange rate.

—To counter a speculative attack on its currency,the central bank must tighten monetary policy.

Answer true,false,or uncertain.Please briefly explain your answer:

b)
—In a small open economy,the domestic real interest rate can be higher than the world real interest rate.

Answer true,false,or uncertain.Please briefly explain your answer.

Homework Answers

Answer #1

answer 1

A. True

Because. tight monetary policy reduces liquidity and increase interest rate which has a negative impact on both production and consumption and therefore economic growth.


B. True

Because

the real interest rate reflect the purchasing power value of the interest paid on an investment or loan and represents the rate of time preference of borrower and lender. Because inflation rate are not constant prospective real interest rate must relay on estimates of expected future inflation over the time to maturity of a loan or investment.

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