IV. Flexible exchange rates and foreign macroeconomic events Consider an open economy with flexible exchange rates....
III. Monetary policy under flexible exchange rates a. How does a monetary expansion in an economy with flexible exchange rates affect consumption and investment? b. How does a monetary expansion in an economy with flexible exchange rates affect net exports?
II. Consider an open economy with flexible exchange rates. Suppose output is at the natural level, but there is a trade deficit. The goal of policy is to reduce the trade deficit and leave the level of output at its natural level. What is the appropriate fiscal and monetary policy mix?
PROBLEM NO 2. An Open Economy in the Short Run and The Medium Run (25 Points) a. Indonesia's equilibrium condition of goods and services market can be expressed by the following equation: Y = CAY - T) + (Y, r) +G-IMY, )) { + X(Y*, £) where: Y=domestic output; Y*= foreign output; C= consumption: T=tax; l=investment, r=real interest rate; G=government spending, € = Real Exchange Rate. If it is assumed that the Marshall-Lerner condition holds. Explain in words the effects...
Consider a small open economy with floating exchange rates. The LM curve of this economy is given as ??=20,000???200+(????), and the IS curve is given as ??=500?20,000??+????, where ????=600?300??. Suppose that ??=1,??=100, and the world interest rate (???) is 0.025. 1) Find out the equilibrium values of output (Y), exchange rate (e), and net export (NX) of this economy. ANSWERS = Y = 400, NX = 400, e = 2/3. 2) Suppose the central bank increases the money supply to...
Use an open market IS-LM diagram to explain the result of fiscal expansion under fixed exchange rate system. What will happen to the IS and LM functions, equilibrium output, domestic interest rate, exchange rate level, capital flow, foreign exchange reserve and net exports? Explain your answer.
2. Consider a small open country (Veniceland) with flexible exchange rate and perfect capital mobility. The economy is at the short-run equilibrium, and the domestic and foreign bonds pay the same interest rate. The government aims at increasing households' consumption to stimulate an economic recovery. Which policy should the government adopt? [2p] a. b. Explain the main economic adjustments leading to the new short-run equilibrium income and interest rate. [4p] How does the policy of the government affect the balance...
Which of the following characteristics describe the US economy a) fixed exchange rates, open capital markets, flexible interest rates b) flexible exchange rate, open capital markets, control of monetary policy c) fixed exchange rate, closed capital markets, no control of monetary policy d) flexible exchange rate, open capital markets, no control over monetary policy
QUESTION 5 Select all of the following that are true regarding interest rates and foreign exchange rates, ceteris p aribus Interest rate parity between countries is a reasonable assumption due to arbitrage and floating exchange rates When a domestic currency depreciates, domestic interest rates rise When domestic interest rates rise the domestic currency depreciates When domestic interest rates rise due to monetary policy, the domestic currency appreciates solely because of the decreased supply of the domestic currency
QUESTION 3 Select all of the following that are true regarding interest rates and foreign exchange rates: When domestic interest rates rise the domestic currency depreciates When a domestic currency depreciates, domestic interest rates rise Interest rate parity between countries is a reasonable assumption due to arbitrage and floating exchange rates When domestic interest rates rise due to monetary policy, the domestic currency appreciates solely because of the decreased supply of the domestic currency QUESTION 4 Select all that are...
Use the money market and foreign exchange models to describe how the expansionary monetary policy in Japan and the restrictive monetary policy in the U.S. affect the interest rates of these two countries i Japan and ius) and the nominal exchange rate between the Japanese Yen and the dollar (Eye). Assume that Japan is the domestic economy and the U.S. is the foreign economy and that these policies are temporary. Do not forget to use the U.I.P. equation and graphs...