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Q. Explain why the exchange rate model based on PPP is a long-run theory.
Answer: PPP theory is a financial approach to the exchange rate. It is a long-run theory for the reason that it doesn't allow for price rigidities. It assumes that prices are able to adjust right away to maintain full employment as well as PPP.
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Q. Explain why after, say Norway unilaterally pegs the krone to the euro, domestic money market disturbances will no longer affect domestic output despite the continuation of float
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Q. Explain how a rise in real income affects aggregate demand. Answer: An increase in domestic real income Y leads to a rise in disposable income Yd. This increases
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