Question 15

Suppose the exchange rate between the Rupee and the dollar was Rs. 30=1$ in the year 2010. Suppose the prices have doubled in India over 20 years while they have remained fixed in USA. What, according to the purchasing power parity theory will be the exchange rate between dollar and rupee in the year 2030.

Answer

In a closed economy, savings and investments are equal at equilibrium level of income.

However, in an open economy savings and investments differ.

Y = C + I + G + X - M
Or, Y = C + I + G + NX [As NX = X - M]
Or, Y - C - G = I + NX
Or, S = I + NX

Savings in an economy include private savings (S_p) and government savings (S_g).

So, S_p + S_g - I
Or, NX =S_p+ S_g – I
SP = Y - C - T SR = T - G

Or, NX = (Y - C - T) + (T - G) - I
Or, NX = Y - C - T +T - G - I
Or, NX = Y - C - G - I
Or, G = Y - C - I - NX
Or, G - T = Y - C - I - NX - T [Subtracting T from both sides]
Or, G - T = Y - C - T - I - NX
Or, G - T = (S_p - I) - NX
Or, G - T = (S_g- I) - (X - M) [NX = X - M]

Popular Questions of Class 12 Macro Economics

Recently Viewed Questions of Class 12 Macro Economics

Write a Comment:

NCERT Solutions

Quick Links

Resources

Support