Show the effects of the following independent shocks on the exchange rate in the foreign exchange market
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Question:
Show the effects of the following independent shocks on the exchange rate in the foreign exchange market diagram when the exchange rate is float- ing.
(5) a. The domestic economy exports coffee which is priced in U.S. dollars, the foreign currency. Demand for coffee rises.
(5) b. Domestic wages rise but foreign wages are unchanged.
(10) c. Suppose investors believe the equilibrium exchange rate is given by the PPP exchange rate. Estimates of the real exchange rate Q are released that show Q > 1.'
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