SELECT * FROM question_mgmt as q WHERE id=5456 AND status=1 SELECT id,question_no,question,chapter FROM question_mgmt as q WHERE courseId=3 AND subId=59 AND chapterId=607 and ex_no='1' AND status=1 ORDER BY CAST(question_no AS UNSIGNED) CBSE Free NCERT Solution of 12th macro-economics Open Economy Macroeconomics suppose the exchange rate between the rupee and th

Question:

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 (Sp) and government savings (Sg).

So, Sp + Sg - I
Or, NX =Sp+ Sg – 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 = (Sp - I) - NX
Or, G - T = (Sg- I) - (X - M) [NX = X - M]


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