Under a Flexible Exchange Rate System, Changes in the Foreign

question 26

Essay

Under a flexible exchange rate system, changes in the foreign rate of interest will affect both the financial markets and the real sector. Explain why this comes about using the IS/LM/BP model. What influence, if any, does the degree of international capital mobility have on the results?

---

Definitions:

Break-Even Point

The financial position at which total revenues equal total costs and expenses, with no net profit or loss, often used to analyze the viability of a business or project.

Variable Cost

Costs that change in proportion to the level of goods or services that a business produces, as opposed to fixed costs which remain constant regardless of production volume.

Contribution Rate

The percentage or amount that is contributed to a retirement or investment plan, usually on a regular basis, by an employer, employee, or both.

Monthly Sales

The total revenue generated from sales activities within a calendar month.