Whendoubling all domestic incomes and doubling the prices of all domestically produced goods and sevices? what

Question

What happens?

A. Assume FIXED exchange rates?

A. Assuming FLOATING exchange rates, what happen?

Answer 1

first of all

the question is incomplete

what happens to what??

what happens to GDP or Exchange rate or BOP

similarly we dont know marginal propensity to import

nither we know the price elasticity of export

all or some these need to be given to correctly answer the question

still ill try to answer

if you double the income the gdp rises and so does the tendency to import but due to rising prices exports will fall and rising prices will further put a pressure on imports.

so if the rate is floating the exchange rate will fall and BOP will worsen.

and if the rate is fixed then as the rate should have fallen but is maintained by the government so there will be net foreign reserves out flow,,,, by the government to keep its currency fixed at the current level

i hope i have covered some aspect but there is so much ambiguity in the question i couldnt do better  

Answer 2

Your economy goes down the tubes; you've created a major international incident; and you probably get forced to resign, recant, or be killed.

You have instantaneously rendered all funds denominated in your currency worth half as much. What do you think will be the reaction of:

- Foreigners who hold your currency? Those who have a choice will just stop doing business with you because the risk would be too high.

- Your citizens who are retired and living on their savings?

- The wealthy in your country whose liquid savings are now worth significantly less?

- Banks in your country whose loans are all denominated in the old currency and who suddenly see their capital evaporate? They'll have no choice but to just go out of business, and without banks, ...

(If you don't see this, consider I take a loan to buy a $100K (25,000 gallons of gasoline) house. A day later, my house is worth $200K (though still only 25,000 gallons of gas), but I still only pay you $100K to pay off the loan, but that $100K is only worth half of what it was worth before (only 12,500 gallons of gas). Yes, they only have to pay the original amounts to their depositors, but that's only one of their costs and since their total assets are worth less, they have less capital to lend.)

And even those citizens with no savings, living hand-to-mouth on income, will get very pissed at you. Just look at what happened when local currencies got replaced by Euro. The changeover was supposed to have no effect on real prices, but just about all the retailers took advantage of the opportunity to actually change the real price, relying on the confusion of the consumer.

In the U.S. there is an underlying price for gasoline and a fixed tax on top of that. Let's say gas is now selling for $4.00/gal of which $0.50 is tax. A true doubling of the price would result in a $7.50 price - double the $3.50 price plus $.50 for the tax. But I can bet that most stations will start charging $8.00 and keep the extra $0.50.

And what about the people who are suddenly in a new and higher tax bracket, paying a larger percentage of their income to the IRS?

And you are concerned about the difference between fixed and floating exchange rates? Welcome to the real world.