Answer to Question #222955 in Macroeconomics for katrichie

Question

(a) Use illustrative diagrams to explain the effects of a monetary contraction on output, composition of output, interest rate, and on the exchange rate under the flexible exchange rate system. (14)

(b) Explain the three channels through which a real depreciation affects the trade balance. (6) 

Answer 1

1. Expansionary Monetary Policy and Its Effects

composition of output

The exchange rate under the flexible exchange rate system

b: Inflation is a rise in the general increase in prices and fall in the purchasing value of money level

Trade policies, is the standards, goals, and rules and regulations of trade agreements between countries

Exchange rate policy it involves choosing an exchange rate system and determining the particular rate at which foreign exchange transactions will take place.