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Phillips Curve and Exchange Rate

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The price level in the economy between 2007 and 2008 rose from 100 to 105. Between 2008 and 2009, the price level rose from 105 to 110.25. How does the short-run Phillips curve predict the unemployment rate will change as a result?
A) The unemployment rate will decrease since inflation decreased.
B) The unemployment rate will decrease since inflation increased.
C) The unemployment rate will increase since inflation increased.
D) The unemployment rate would not change since there is no change in the rate of inflation.

You are traveling in Ireland and are thinking about buying a new digital camera. You have decided that you would be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the camera you are looking at costs 115 euros, under which of the following exchange rates would you be willing to purchase the camera? (Assume no taxes or duties are associated with the purchase.)
A) 0.56 euros per dollar
B) 0.89 euros per dollar
C) 0.92 euros per dollar
D) You would purchase the new camera at any of the above exchange rates

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First answer - B, the Philips curve postulates an inverse relationship between prices ...

Solution Summary

The price level in the economy between 2007 and 2008 rose from 100 to 105. Between 2008 and 2009, the price level rose from 105 to 110.25. How does the short-run Phillips curve predict the unemployment rate will change as a result?

You are traveling in Ireland and are thinking about buying a new digital camera. You have decided that you would be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the camera you are looking at costs 115 euros, under which of the following exchange rates would you be willing to purchase the camera?

$2.19
See Also This Related BrainMass Solution

Need Help with International Macro

2. A 1991 The Wall Street Journal cover page article entitled "Foreign Rate Increases May Worsen Slump" explained how the German central bank raised domestic interest rates in order to reduce inflation below the 3% level. At the same time, the U.S. central bank reduced domestic interest rates to fight the deepening recession in the United States.
a. Explain the pressures that rising German interest rates put on the other European Union (EU) countries' currencies. Specifically, assume exchange rates within the EU were absolutely fixed. Explain the economic effects a rise in the real German interest rate put on the DM/FF exchange rate and what the French central bank (i.e., the Bank of France) would have to do to keep the exchange rate fixed.
b. Explain the economic effects the rise in German interest rates put on the DM/FF exchange rate and what the German central bank (i.e., the Bundesbank) would have to do to keep the exchange rate fixed.
d. What is the Phillips Curve? Are your results in question (1a) consistent with the Phillips Curve?
3. In 1991, Argentina adopted a currency board that had the responsibility to maintain a fixed exchange rate between the Argentine peso and the U.S. dollar ($1 = 1 Argentine Peso). Through the Convertibility Law, Argentina also established that each peso in circulation had to be 100% collateralized with reserves in the Central Bank, assuring 100% coverage of Argentine monetary base. Assume the government promised to reduce the surging unemployment rate by trying to stimulate significant new economic growth by means of expansionary monetary policy. Since it would be constrained by the Convertibility Law from increasing the monetary base, suppose the central bank expanded the money supply by reducing the reserve ratio. Explain the economic effects that expansionary monetary policy would have on Argentina's real and nominal GDP, monetary base, money supply, real and nominal interest rates, current account, financial account, level of international reserves, real investment spending, unemployment rate, inflation rate, and velocity of money.

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