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IMPORTANT QUESTIONS

1. Suppose the exchange rate between the Rupee and the dollar was Rs. 30 = 1$ in the year 2010. Suppose the prices have doubled in India over 20 years while they have remained fixed in USA. What, according to the purchasing power parity theory will be the exchange rate between dollar and rupee in the year 2030.

   Medium View solution
2. In the above example, if exports change to X = 100, find the change in equilibrium income and the net export balance.

   Hard View solution
3. Suppose C = 40 + 0.8Y D. T = 50, I = 60, G = 40, X = 90, M = 50 + 0.05Y <br>
   
   (a) Find equilibrium income <br>
   
   (b) Find the net export balance at equilibrium income <br>
   
   (c) What happens to equilibrium income and the net export balance when the government purchases increase from 40 to 50?

   Hard View solution
4. Calculate the open economy multiplier with proportional taxes, T = tY, instead of lump−sum taxes as assumed in the text.

   Hard View solution
5. Why is the open economy autonomous expenditure multiplier smaller than the closed economy one?

   Medium View solution
6. What is the marginal propensity to import when M = 60 + 0.06Y? What is the relationship between the marginal propensity to import and the aggregate demand function?

   Hard View solution
7. Are the concepts of demand for domestic goods and domestic demand for goods the same?

   Medium View solution
8. Would the central bank need to intervene in a managed floating system? Explain why.

   Hard View solution
9. Differentiate between devaluation and depreciation.

   Medium View solution
10. How is the exchange rate determined under a flexible exchange rate regime?

    Easy View solution