Author Question: From the perspective of the United States, a reduction in the nominal exchange rate will cause which ... (Read 45 times)

AEWBW · **on:** Jun 30, 2018

From the perspective of the United States, a reduction in the nominal exchange rate will cause which of the following?

A) The dollar becomes more expensive to foreigners.
B) Foreign goods are less expensive to Americans.
C) Foreign currency is less expensive to Americans.
D) American goods are less expensive to foreigners.
E) none of the above

Question 2

Graphically illustrate (using the WS and PS relations) and explain the effects of a reduction in the markup on the equilibrium real wage, the natural rate of unemployment, the natural level of employment, and the natural level of output.

What will be an ideal response?

olivia_paige29 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

D

Answer to Question 2

A reduction in the markup will cause firms to reduce the price given the nominal wage. This will cause the real wage based on price setting behavior to increase; this is represented by a upward shift in the PS curve. This increase in the real wage will also occur with an decrease in the unemployment rate. So, the natural rate of unemployment will decrease and the natural level of employment and, therefore, output will increase. The equilibrium real wage will also be higher.