ECO365H1 Study Guide - Money Supply, Government Spending, Devaluation
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Ecmc61 chapter 18 review questions answer key. Suppose central bank purchases da (dacb): dacb ms r . This debit entry is offset by a credit entry in ort because central bank sells fc. Suppose there is a devaluation of dc from e0 to e1: Y) or p because y1 > yfe: p because p = P dd shifts leftward to dd(p1). P aa shifts downward to aa(ms1, p1): point c is the long-run equilibrium: y = yfe, e = e1 and ca = 0 (no change in q). Note: devaluation of dc only improves the country"s ca in the short run. Nominal devaluation of a currency is neutral in the long run because the increase in the price level in the long run fully offsets the initial effect of a devaluation on the real exchange rate. Suppose government spending increases, g (assume the economy starts at ca = 0):
