Author Question: To join the EMU, a country should have no more than A) 1.5 percent inflation rate above the ... (Read 23 times)

Zoey63294 · **on:** Jun 30, 2018

To join the EMU, a country should have no more than

A) 1.5 percent inflation rate above the average of the three EU member states with the highest inflation.
B) 3 percent inflation rate above the average of the three EU member states with the lowest inflation.
C) 4 percent inflation rate above the average of the three EU member states with the lowest inflation.
D) 1.5 percent inflation rate above the average of the three EU member states with the lowest inflation.
E) 2 percent inflation rate above the average of the three EU member states with the lowest inflation.

Question 2

Use the DD-AA model to compare the domestic economic response under flexible and fixed exchange rate regimes to a temporary rise in export demand from foreign countries.

What will be an ideal response?

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

Answer to Question 1

D

Answer to Question 2

Under floating rate: The DD curve shifts right. AA does not change because the temporary increase will not affect the long run expected exchange rate. Output rises and E falls (depreciates).
Under fixed rate: The DD curve shifts right. The central bank intervenes to prevent a change in the exchange rate. By selling domestic currency they expand the domestic supply and the AA curve shifts right, keeping E constant. Output however will rise due to the new equilibrium of the DD and AA curves to the right of its former location.