A Country Begins with External Balance (Its Official Settlements Balance

question 47

Essay

A country begins with external balance (its official settlements balance is zero). Explain the effects of a shift by the country to an expansionary monetary policy on the balance of payments of the country. (Assume that the exchange rate is fixed, but do not consider any follow-on effects from defending the fixed rate.)

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Definitions:

Selling Price Per Unit

The amount of money charged for each unit of a product or service sold.

Contribution Margin

The amount of revenue remaining after deducting variable costs, used to cover fixed expenses and generate earnings.

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance premiums.

Variable Costs

Expenses that change in proportion to the activity of a business, such as sales volume or production levels.