Question
Two countries operating in the global economy are known as Superich and Megapoor. Initially, the real interest rate in Superich is higher than the real
Two countries operating in the global economy are known as Superich and Megapoor. Initially, the real interest rate in Superich is higher than the real interest rate in Megapoor. a) Illustrate and explain the likely outcome of the flow of capital between Superich and Megapoor. b) Assume that Superich has a floating exchange rate. Using an exchange rate diagram, illustrate and explain an increase in the interest rate in Superich on Superich's exchange rate with Megapoor. c) What is one advantage and one disadvantage of a depreciation in a country's currency? ( d) Megapoor currently has a fractional-reserve banking system. Explain the concept of such a system and the impact of a decrease in banks' desired reserve-deposit ratio on the money supply in Megapoor. e) If GDP and the velocity of money remains constant in Megapoor, explain the impact of a decrease in banks' desired reserve-deposit ratio on inflation for the economy.
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