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?

---

Definitions:

Demand Uncertainty

The unpredictability of consumer demand for a product or service, making it difficult for businesses to forecast accurately and plan inventory levels or production schedules.

Supply Uncertainty

The risk of unpredictability in obtaining required materials or products from suppliers, which can affect production schedules, costs, and market responsiveness.

Exchange Rates

The value of one currency expressed in terms of another currency, which plays a critical role in international trade and finance.

Simulation Methods

Techniques used to imitate the operation of real-world processes or systems over time, often for the purpose of analysis or training.