Explain the following figure: What will be an ideal ...

[ts19998]

Explain the following figure:
 
  What will be an ideal response?

Question 2

The Case of the Missing Trade refers to
 
  A) the fact that factor trade is less than predicted by the Heckscher-Ohlin theory.
  B) the 9th volume of the Hardy Boys' Mystery series.
  C) the fact that world exports does not equal world imports.
  D) the fact that the Heckscher Ohlin theory predicts much less volume of trade than actually exists.
  E) the fact that the Heckscher Ohlin theory never applies to China-U.S. trade practices.

[ecabral0]

Answer to Question 1

The figure depicts the effect of a permanent increase in the money supply starting from full employment equilibrium. After the initial increase in the money supply and the move of the AA curve to the right from AA1 to AA2, a steadily increasing price level shifts the AA and the DD schedules to the left until a new long-run equilibrium is reached. Note that point 3 is above point 1, because Ee is permanently higher after a permanent increase in the money supply. The expected exchange rate, Ee, has risen by the same percentage as Ms. Notice that along the adjustment path between the initial short-run equilibrium (point 2 ) and the long-run equilibrium (point 3 ) the domestic currency actually appreciates (from E2 to E3 ) following its initial sharp depreciation (from E1 to E2).

Answer to Question 2

A

[ts19998]

Thank you

[ecabral0]

No problemo