According to the question, there will be no change in interest rate and income (option 7).
When capital is immobile then fixed exchange rate curve (BP) is vertical. As public expenditure increases which is a part of fiscal policy then IS curve shifts from IS1 to IS2. This situation of the deficit in the balance of payment. This depreciates the value of the currency. To correct the situation, the government will sell foreign currency and buy back the domestic currency. This will shift the LM curve from LM1 to LM2. New equilibrium shifts from E1 to E2. This, fiscal policy under fixed exchange rate with capital immobility does not affect the income and rate of interest.
Exercise 3 (7 points): According to Mundell-Fleming (IS-LM-BP) model, which are the consequences (i.e the new...
Problem 2 (4 points) a) Show graphically using the Mundell-Fleming model the of an introduction of export promotion tools (that improve net exports exogenously, irrespective of the exchange rate). Assume that a country has a fixed exchange rate and perfect capital mobility. (2 p) b) Will the introduction of export promotion policy tools improve net exports (current account balance) in equilibrium, as argued by many politicians? Provide an appropriate graph and explain. (2 p) Problem 2 (4 points) a) Show...
The introduction of automatic teller machines, which reduces the demand for money, will,according to the Mundell–Fleming model with fixed exchange rates have no change in income or net exports. True False The IS curve shifts to the right when interest rates decreases thereby increasing GDP. True False
2. Within the Mundell-Fleming model assuming perfect capital mobility, analyse the effects of a positive shock to money demand i.e., an increase in the demand for money for given levels of income and the interest rate). Consider the effect of the shock on income when the exchange rate is fixed and when it is flexible.
Consider the Mundell-Fleming short-run model of a small open economy under floating exchange rates described by the following equations (1) through (7). Assume that there are free capital flows and that interest rate parity holds so that where 5 is the world interest rate. (1) Cu 400+0.8 (Y-D: (2) 1 = 850-60r (3) G = 1200; (4) T=1000 + 0.25Y: (5) NX = 600 - 200e : (6) Y=C+I+G+ NX; (7) (M/P )= 0.5Y -50rt. Equation (6) is the goods...
The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell–Fleming model with floating exchange rates, lead to a rise in both income and net exports. True False If the Fed announces that it will fix the exchange rate at 100 yen per dollar, but with the current money supply the equilibrium exchange rate is 150 yen per dollar, then the money supply must be increased to maintain the Fed's announcement. True False
Question 6. (20 points) Use the Mundell-Fleming model and diagrams to predict what would happen to aggregate income, the exchange rate, and the trade balance under both floating and fixed exchange rates in response to each of the following policies in a small open economy. a. (10 points) Government of Canada cuts taxes. b. (10 points) Bank of Canada increases money supply
Macroeconomics: Intermediate Theory/ Calc-based 4. Consider an economy that abides by a Mundell Fleming model. Capital is imperfectly mobile, prices are perfectly sticky in the short run, and the exchange rate is fixed. Assume that the current exchange rate is at its tar get and the current domestic interest rate is equal to the foreign interest rate. Suppose the local central bank wants to stimulate economic activity by increasing the supply of money through conventional open market oper- ations. Which...
Please give a detailed solution, thank you! 5. Given C 5000.75 (Y T) I = 2,000 -50r G 1,000 T 1,000 - 10Y - 2000r Ms 50,000 P a. Derive the IS curve and the LM curve, and find the equilibrium interest rate and output b. Government spending increases by 500. If the central bank does not react at all to this change, what is the new equilibrium output and interest rate? If instead the central bank wants to keep...
Consider the Mundel-Fleming small open economy model: Y=C(Y-T)+1(1) + G Y = F(K,L) (M/P) L(r+z® Y) Goods Money C = 50+0.8(Y- T) M 3000 I = 200-20r r*=5 NX = 200-508 P = 3 G=T= 150 L(Y, r) Y - 30r 1- find the IS* equation (hint : y as a function of e) 2- find the LM* equation (hint, also relates y and maybe e) 3-draw the IS-LM curve I y 4- find the equilibrium interest rate (trick question!)...
Venus Island is a small open economy with perfect capital mobility. The goods market, exchange rate market and money market is in equilibrium when aggregate income/output is Y1, exchange rate is e1 and interest rate r1. Then the government implemented a contractionary fiscal policy. a. Use Mundell-Fleming model to show and explain, by referring to the events in the each of the markets, the predicted effects of the income tax increase. Assume that Venus Island uses a floating exchange rate....