REVIEW QUESTIONS

1. Define nominal exchange rate and real exchange rate. How are changes in the real exchange rate and the nominal exchange rate related?

2. What are the two main types of exchange-rate sys­tems? Currently, which type of system determines the values of the major currencies, such as the dollar, yen, and euro?

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4. What is the J curve? What explains the behavior of net exports represented by the J curve?

5. Why is the real exchange rate important in macroeco­nomic analysis? How does it affect net exports? Explain and give an example.

6. After seven years of decreasing and steadily low interest rates, the Federal Reserve Bank decided in December 2015 to make a policy change and increase the Federal Fund Rate. Assuming that all other factors are held constant, which effects would this change in real interest rates have had on the U.S. economy?

7. What are the factors that influence the open economy IS curve? How did China benefit from opening its economy?

8. How are net exports affected by expansionary fiscal policy? By expansionary monetary policy? What is the potential ambiguity in determining these effects?

9. What effects does expansionary monetary policy have on the nominal exchange rate in both the short and long run? Explain.

10. What is the fundamental value of a currency? What does it mean to say that a currency is overvalued? Why is an overvalued currency a problem? What can a country do about an overvalued currency?

11. Find a country that has fixed its exchange rate to a foreign currency. Describe its advantages and disad­vantages for the economy.

12. Discuss the relative advantages and disadvantages of flexible exchange rates, fixed exchange rates, and a currency union.

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