Suppose That There Is an Exogenous Increase in Foreign Prices

question 10

Essay

Suppose that there is an exogenous increase in foreign prices. Using the AD/AS framework, explain how this would affect the domestic economy under fixed exchange rates and under flexible exchange rates. Would your answer be different if there were no imported inputs into the production process? Why or why not?

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Definitions:

Normative Statements

Claims that express judgments about what ought to be, incorporating opinions and values rather than factual assertions.

Positive Statements

Factual statements about the world that can be tested and validated; they describe "what is" rather than "what ought to be."

Normative Statement

An opinion or judgment that reflects what one believes ought to be, as opposed to what actually is; it cannot be proven true or false.

Positive Statement

An objective statement based on factual information and evidence, which can be tested and verified as true or false.