Author Question: Explain why in an economy with fixed exchange rates, monetary policy will not cause expenditure ... (Read 131 times)

JMatthes · **on:** Jun 30, 2018

Explain why in an economy with fixed exchange rates, monetary policy will not cause expenditure switching.

What will be an ideal response?

Question 2

The graph above shows the PPC for a country that can produce oil or televisions. The straight line is the trade line and CPC if production is at Point A. Which of the following is a true statement?

A) This country should produce relatively more oil and relatively fewer televisions.
B) This country should produce relatively more televisions and relatively less oil.
C) This country should produce more of both goods.
D) This country is producing the optimal mix of oil and televisions to maximize its income.

macmac · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Expenditure switching refers to switching back and forth between domestic and foreign goods, in this case, in response to a change in the exchange rate. Expenditure switching magnifies the effects of monetary policy when rates are flexible. In an economy with a fixed exchange rate, changes in the money supply will not cause expenditure switching because the exchange rate does not change.

Answer to Question 2

A