NCERT Solution Economics Part 2 Class 12 Chapter 6 Open Economy Macroeconomics
NCERT Solution Economics Part 2 Class 12 Chapter 6 Open Economy Macroeconomics all questions and answers. Economics Part 2 Class 12 6th Chapter Open Economy Macroeconomics exercise solution and experts answer. As one of online learning platforms, we (netex.) are excited to offer the NCERT Solution Economics Part 2 Class 12 Chapter 6. This solution is designed to help students who are looking to brush up on their physics concepts on Chapter 6 Open Economy Macroeconomics.
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1.) Differentiate between balance of trade and current account balance.
Ans.
BALANCE OF TRADE | CURRENT ACCOUNT BALANCE |
Export of goods is entered as a credit item in BOT, whereas import of goods is entered as a debit item in BOT. It is also known as Trade Balance. | Current Account is the record of trade in goods and services and transfer payments. |
Balance of Trade (BOT) is the difference between the value of exports and value of imports of goods of a country in a given period of time. | Trade in goods includes exports and imports of goods. Trade in services includes factor income and non-factor income transactions. |
BOT is said to be in balance when exports of goods are equal to the imports of goods. Surplus BOT or Trade surplus will arise if country exports more goods than what it imports. | Current Account is in balance when receipts on current account are equal to the payments on the current account. A surplus current account means that the nation is a lender to other countries and a deficit current account means that the nation is a borrower from other countries. |
Balance of trade includes only visible items | Current account records both visible and invisible items |
2.) What are official reserve transactions? Explain their importance in the balance of payments.
Ans. We note that official reserve transactions are more relevant under a regime of fixed exchange rates than when exchange rates are floating.central banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such actions are appropriate. Official reserve transactions are, therefore, not equal to zero.
3.) Distinguish between the nominal exchange rate and the real exchange rate. If you were to decide whether to buy domestic goods or foreign goods, which rate would be more relevant? Explain.
Ans. Real Exchange Rate – real exchange rate is defined as the relative price of foreign goods in terms of domestic goods.
Nominal Exchange Rate-Exports depend positively on foreign income and the real exchange rate. Thus, exports and imports depend on domestic income, foreign income and the real exchange rate. We assume price levels and the nominal exchange rate to be constant.
4.) Suppose it takes 1.25 yen to buy a rupee, and the price level in Japan is 3 and the price level in India is 1.2. Calculate the real exchange rate between India and Japan (the price of Japanese goods in terms of Indian goods). (Hint: First find out the nominal exchange rate as a price of yen in rupees).
Ans.
Given , Japan Pf=3
India = P=1.2
Real exchange rate = Ep1/p
Price of 1.25 yen = 1 rs.
Price of 1 yen = 1/1.25
= 100/125
= 4/5 rs
E=4/5
Ep1/p
=4/5*30/1.2
=2
Therefore the real exchange rate is 2.
5.) Explain the automatic mechanism by which BoP equilibrium was achieved under the gold standard.
Ans. The result of this price-specie-flow (precious metals were referred to as ‘specie’ in the eighteenth century) mechanism is normally to improve the BoP of the country losing gold, and worsen that of the country with the favourable trade balance, until equilibrium in international trade is re-established at relative prices that keep imports and exports in balance with no further net gold flow. under the gold standard system gold was taken as s common unit for measuring other country’s currencies . The equilibrium is stable and self-correcting, requiring no tariffs and state action. Thus, fixed exchange rates were maintained by an automatic equilibrating mechanism.
6.) How is the exchange rate determined under a flexible exchange rate regime?
Ans.
Different countries have different methods of determining their currency’s exchange rate. It can be determined through Flexible Exchange Rate, Fixed Exchange Rate or Managed Floating Exchange Rate.This exchange rate is determined by the market forces of demand and supply. It is also known as Floating Exchange Rate.The purchasing Power (PPP) theory is used to make long-run predictions about exchange rates in a flexible exchange rate system.The flexible exchange rate system gives the government more flexibility and they do not need to maintain large stocks of foreign exchange reserves. It is determined by the free play of supply and demand forces in the international money market.
7.) Differentiate between devaluation and depreciation.
Ans. In a fixed exchange rate system, when some government action increases the exchange rate (thereby, making domestic currency cheaper) is called Devaluation. On the other hand, a Revaluation is said to occur, when the Government decreases the exchange rate (thereby, making domestic currency costlier) in a fixed exchange rate system.Increase in exchange rate implies that the price of foreign currency (dollar) in terms of domestic currency (rupees) has increased. This is called Depreciation of domestic currency (rupees) in terms of foreign currency (dollars). In devaluation it takes place due to official action . and in other hand depreciation it takes place due to market forces.
8.) Would the central bank need to intervene in a managed floating system? Explain why.
Ans.
It is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part). Under this system, also called dirty floating, central banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such actions are appropriate. In a completely flexible system, the Central banks do not intervene in the foreign exchange market.Without any formal international agreement, the world has moved on to what can be best described as a managed floating exchange rate system. It is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part). Under this system, also called dirty floating, central banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such actions are appropriate. Official reserve transactions are, therefore, not equal to zero. In a managed floating system, foreign exchange rate is determined by market forces.
9.) Are the concepts of demand for domestic goods and domestic demand for goods the same?
Ans. No, both concepts are not the same.The demand for imports is thus assumed to depend on income and have an autonomous component.Buying foreign goods is expenditure from our country and it becomes the income of that foreign country. Hence, the purchase of foreign goods or imports decreases the domestic demand for goods and services in our country. demand for domestic goods made by both domestic and foreign countries , produced in our economy. Domestic demand for goods by our own country for goods which may be produced in foreign countries.
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10.) What is the marginal propensity to import when M = 60 + 0.06Y? What is the relationship between the marginal propensity to import and the aggregate demand function?
Ans.
Given as M=60+0.06Y
M=M+mY
Here marginal propensity =0.06
Income increase aggregate demand decreases.
11.) Why is the open economy autonomous expenditure multiplier smaller than the closed economy one?
Ans. The increase in income will now be spent on domestic goods as well as imports.
In order to examine the effects of allowing for foreign trade in the income expenditure framework, the equivalent expression for the equilibrium income in a closed economy model. In both equations, equilibrium income is expressed as a product of two terms, the autonomous expenditure multiplier and the level of autonomous expenditures. We consider how each of these change in the open economy context. Increase in autonomous demand leads to a smaller increase in output as compared to a closed economy.
13.) Suppose C = 40 + 0.8Y D, T = 50, I = 60, G = 40, X = 90, M = 50 + 0.05Y (a) Find equilibrium income. (b) Find the net export balance at equilibrium income (c) What happens to equilibrium income and the net export balance when the government purchases increase from 40 and 50?
Given, C = 40 + 0.8YD
T = 50
I = 60
G = 40
X = 90
M = 50 + 0.05Y
level of income
Y = C + c (Y – T) + I + G + X – M – mY
Y = A/1−c+M
A = C – cT + I + G + X – M
=C – cT + I + G + X + M/1−c+m
= 40−0.8*50+60+40+90−50/1−0.8+0.05
= 140/0.25
= 140/25×100
= 560
(ii) Net exports income
NX = X – M – mY
= 90 – 50 – 0.05 × 560
= 40 – 28
= 12
if G increases from 40 to 50,
= C – cT + I + G + X – M/1 – c + m
= 40−0.8*50+60+50+90−50/1−0.8+0.05
= 40−40+60+50+40/0.25
= 150/0.25=150/25*100
=600
Net balance
NX = X – M – mY
= 90 – 50 – 0.05 × 600
= 40 – 30 = 10
14.) In the above example, if exports change to X = 100, find the change in equilibrium income and the net export balance.
Ans.
Given ,
C=40+0.8YD
T=50
I=60
G=40
X=100
Income = (Y)=A/(1 – c + m)
= (C – cT + I + G + X – M)/(1 – c + m)
= (40 – 0.8 x 50 + 40 + 60 + 100 – 50)/(1 – 0.8 + 0.05)
= (40 – 40 + 40 + 60 + 100 – 50)/0.25
= 150/0.25
= (150 x 100)/25
= 600
Net export balance NX = X – M – 0.05Y
= 100 – 50 – 0.05 x 600
= 50 – 0.05 x 60
= 50 – 30
=20
16.) If inflation is higher in country A than in Country B, and the exchange rate between the two countries is fixed, what is likely to happen to the trade balance between the two countries.
ans. If inflation is higher in country A than in country B, and the exchange rate between the two countries is fixed, the trade balance of country A will be deficit while that of country B will be surplus.
17.) Should a current account deficit be a cause for alarm? Explain.
Current Account is in balance when receipts on current account are equal to the payments on the current account. A surplus current account means that the nation is a lender to other countries and a deficit current account means that the nation is a borrower from other countries.any current account deficit must be financed by a capital account surplus, that is, a net capital inflow.and it is not taken as a cause for alarm.
19.) Discuss some of the exchange rate arrangements that countries have entered ? into to bring about stability in their external accounts.
official reserve transactions are more relevant under a regime of fixed exchange rates than when exchange rates are floating.e. It can be determined through Flexible Exchange Rate, Fixed Exchange Rate or Managed Floating Exchange Rate.In a fixed exchange rate system, when some government action increases the exchange rate (thereby, making domestic currency cheaper) is called Devaluation. On the other hand, a Revaluation is said to occur, when the Government decreases the exchange rate (thereby, making domestic currency costlier) in a fixed exchange rate system.
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