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:

Vascular Bundle

Multistranded bundle of xylem, phloem, and sclerenchyma fibers running through a stem or leaf.

Endodermal

Relating to the innermost layer of the three primary germ layers in the embryo, giving rise to the gastrointestinal tract, liver, and lungs.

Mesophyll

Photosynthetic parenchyma of plants.

Sieve Tubes

A series of sieve tube elements placed end to end to form channels for nutrient transport in plants.