- What is the difference between the real and the nominal exchange rate? Give an example to explain this to a
non-economist. Is an improvement in the terms of trade the same as an improvement in price
competitiveness? Is an increase in the real cost of imports an improvement or a deterioration in the terms of
trade? - “A sudden increase in interest rates in the European Union would likely lead to both depreciation of the US
dollar and upward pressure on US interest rates.” Agree? Disagree? Why? - The new member states are likely to be affected by the Balassa-Samuelson effect. What does this imply for
their inflation rates once they join the Eurozone? - How effective is the exchange rate instrument in correcting asymmetric shocks? What other instruments
could be used? - Why does devaluing the domestic currency have an expansionary effect on the economy? Does this
expansionary effect take place if capital is perfectly immobile? Why or why not? - Using the IS-MP-IRP framework, examine the case when fiscal and monetary policies are jointly made
expansionary. Characterize the differences between the fixed and flexible exchange rate regimes. Which
policies work and which do not?
Sample Solution
