What is the short-run effect on the exchange rate of an increase in domestic real GNP, given expectations about future exchange rates?
Imagine that the central bank of an economy with unemployment doubles its money supply. In the long run, full employment is restored and output returns to its full employment level. On the (admittedly unlikely) assumption that the interest rate before money supply increase equals the long-run interest rate, is the long-run increase in the price level more than proportional or less than proportional to the money supply change? What if (as is more likely) the interest rate was initially below its long-run level?
Take a shot. What do you think would happen to exchange rates.
Start with drawing your IS-LM curves applied to open international markets.
I've only been in this class for 4 weeks, so we're not that far along yet. I've run into a couple of problems on my homework that I just don't understand:
1. Suppose the price elasticity of demand is 3, and the price elasticity of supply is 1. What happens to the price if the demand goes down by 12%?
2. Suppose the price elasticity of demand is 3, and the price elasticity of supply is 1. If the government levies a sales tax, what percentage of taxes (%) does the consumer pay?
3. Suppose the price elasticity of demand is 3, and the price elasticity of supply is 1. If the government levies a sales tax, what percentage of taxes (%) does the producer pay?
Thank you in advance!
Effect of chnge in echange rate oon export and real gdp
1. To find out what happens to the price when demand goes down by 12%, you can use the price elasticity of demand formula. Price elasticity of demand is calculated using the following formula:
Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
Given that the price elasticity of demand is 3, and the demand goes down by 12%, the percent change in quantity demanded is -12%. Let's assume the price changes by x%.
So, substituting the values into the formula:
3 = (-12%)/(x%)
To solve for x%, we rearrange the equation:
x% = (-12%) / 3
x% = -4%
Therefore, if the demand goes down by 12%, the price would decrease by 4%.
2. To determine what percentage of taxes (%) the consumer pays when the government levies a sales tax, you can use the concept of tax incidence. Tax incidence refers to the distribution of the burden of a tax between buyers and sellers.
In this case, the price elasticity of demand is 3, which means demand is relatively elastic, and the price elasticity of supply is 1, which means supply is relatively inelastic. When a tax is imposed on a product, the burden of the tax falls more heavily on the party with less elastic demand or supply.
In this scenario, since the demand is more elastic (price elasticity of 3) compared to supply (price elasticity of 1), the consumer will bear a larger portion of the tax burden. The exact percentage of taxes the consumer pays depends on the relative elasticities, but it can be greater than 50%.
3. Similarly, to determine what percentage of taxes (%) the producer pays when the government levies a sales tax, you can use the concept of tax incidence. In this scenario, since the demand is more elastic (price elasticity of 3) compared to supply (price elasticity of 1), the producer will bear a smaller portion of the tax burden. Again, the exact percentage of taxes the producer pays depends on the relative elasticities, but it can be less than 50%.
1. If the price elasticity of demand is 3 and the price elasticity of supply is 1, we can use the formula for elasticity to determine the change in price.
The formula for elasticity is: Elasticity = (% change in quantity) / (% change in price)
Given that the price elasticity of demand is 3, we know that the % change in quantity is three times the % change in price.
If the demand goes down by 12%, the % change in quantity is -12% and we can solve for the % change in price using the elasticity formula:
3 = (-12%) / (% change in price)
Rearranging the equation, we get:
% change in price = (-12%) / 3
% change in price = -4%
Therefore, the price would decrease by 4%.
2. If the government levies a sales tax, the percentage of taxes (%) that the consumer pays can be determined using the price elasticity of demand and supply.
From the price elasticity of demand being 3 and the price elasticity of supply being 1, we can determine that the burden of the tax will be mainly borne by the consumer.
The percentage of taxes (%) that the consumer pays can be calculated using the formula:
Percentage of taxes paid by consumer = (Elasticity of demand / (Elasticity of demand + Elasticity of supply)) x 100
Plugging in the values, we get:
Percentage of taxes paid by consumer = (3 / (3 + 1)) x 100
Percentage of taxes paid by consumer = 75%
Therefore, the consumer pays 75% of the sales tax.
3. Similarly, if the government levies a sales tax, the percentage of taxes (%) that the producer pays can be determined using the price elasticity of demand and supply.
The percentage of taxes (%) that the producer pays can be calculated using the formula:
Percentage of taxes paid by producer = (Elasticity of supply / (Elasticity of demand + Elasticity of supply)) x 100
Plugging in the values, we get:
Percentage of taxes paid by producer = (1 / (3 + 1)) x 100
Percentage of taxes paid by producer = 25%
Therefore, the producer pays 25% of the sales tax.