If countries attempt to achieve similar rates of economic growth through demand management policy, for which of the following reasons may the equilibrium rate of exchange change over the longer term?
(i) The marginal propensity to import differs from one country to another.
(ii) The relative income elasticities of demand for imports and exports differ from one country to another.
(iii) The rate of growth of productivity differs from one country to another.

Question

If countries attempt to achieve similar rates of economic growth through demand management policy, for which of the following reasons may the equilibrium rate of exchange change over the longer term?
 (i) The marginal propensity to import differs from one country to another.
(ii) The relative income elasticities of demand for imports and exports differ from one country to another.
(iii) The rate of growth of productivity differs from one country to another.

Quizplus · Accepted Answer

(i) Differences in the marginal propensity to import can lead to variations in the demand for foreign currencies, affecting exchange rates. (ii) If the income elasticity of demand for imports and exports varies, it can change the trade balance and influence exchange rates. (iii) Divergent productivity growth rates can alter competitive positions and trade balances, impacting exchange rates.

If Countries Attempt to Achieve Similar Rates of Economic Growth