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Consider the following classical economy:

AD Y = 400 + 50 M/P
AS Y = Y = 1000.

This economy produces only wine, its output is measured in terms of wine, and its currency is francs. It trades with a country that produces only cheese, and the currency of that country is crowns. The real exchange rate, e, equals 5 wedges of cheese per bottle of wine. The foreign price level is 20 crowns per wedge of cheese, and the domestic money supply is 48 francs.

a . What is the domestic price level? What is the fundamental value of the (nominal) exchange rate?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M938302

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