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Suppose That, in a World of Flexible Wages and Prices

question 12

Essay

Suppose that, in a world of flexible wages and prices, there is a sudden autonomous increase in the flow of short-term financial capital into country A. Will the impact on country A's aggregate demand (AD) curve and hence on output in the short run be different in if A has a flexible exchange rate rather than a fixed exchange rate? Explain.


Definitions:

Marginal Efficiency

The additional benefit received from consuming or producing one more unit of a good or service.

Capital

Refers to any financial asset, including cash, equipment, and buildings, used in production of goods or services.

Investment Project

A project undertaken by a company or an individual in expectation of generating future financial returns.

Bankrupt

A legal status for individuals or entities that cannot repay the debts they owe to creditors.

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