Author Question: How does the open-economy IS-MP model incorporate net exports with a fixed exchange rate system? ... (Read 53 times)

APUS57 · **on:** Jun 30, 2018

How does the open-economy IS-MP model incorporate net exports with a fixed exchange rate system?

What will be an ideal response?

Question 2

Pamela's bakery produces 500 loaves of bread in a given year. Pamela pays 100 for flour and yeast, pays 600 in wages, pays 50 in interest on an existing loan, and pays 100 in taxes to the government.

One of Pamela's bread slicing machines, which cost 75 each, wears out over the course of the year and must be scrapped. Pamela's profit for the year equals 75. Pamela's bread, therefore, sells for A) 0.50 per loaf.
B) 1.00 per loaf.
C) 2.00 per loaf.
D) cannot tell, insufficient information

lucas dlamini · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Under a fixed exchange-rate system, changes in the real interest rate do not change the nominal exchange rate, so net exports do not change as the real interest rate changes. The IS curve under a fixed exchange-rate system is similar to the IS curve for a closed economy.

Answer to Question 2

C