Please use a figure to discuss whether or not a devaluation under ...

[itsmyluck]

Please use a figure to discuss whether or not a devaluation under a fixed exchange rate has the same long-run effect as a proportional increase in the money supply under a floating rate.
 
  What will be an ideal response?

Question 2

In 1929, government purchases accounted for
 
  A) only 18.5 percent of U.S. GNP.
  B) only 8.5 percent of U.S. GNP.
  C) 28.5 percent of U.S. GNP.
  D) 38.5 percent of U.S. GNP.
  E) 48.5 percent of U.S. GNP.

[dominiqueenicolee]

Answer to Question 1

A currency devaluation shifts the AA schedule outward from equilibrium point 1 to equilibrium point 2. The devaluation does not change long-run demand or supply conditions in the output market. Thus, the increase in the long-run price level will exactly offset the increase in exchange rate. Thus, a devaluation is neutral in the long run and this is the exact same scenario as for an increase in the money supply under a floating exchange rate.

Answer to Question 2

B

[itsmyluck]

Thank you

[dominiqueenicolee]

No problemo