Question

6) Using money supply-money demand and the interest rate parity relationship, show how the central bank can maintain fixed exchange rates in the face of changes in output. 7) Using the DD-AA model under fixed exchange rates, show the effects of monetary policy. What are the main results? 8) Using the DD-AA model under fixed exchange rates, show the effects of fiscal policy. What are the main results? 9) Using the DD-AA model under fixed exchange rates, show the effects of a devaluation policy. What are the main results? 10) Using money supply-money demand and the interest rate parity relationship, show how the central bank can deal with a balance of payments crisis and capital flight

Answer 1

Ques6

- A monetary approach change in cash flexibly has no impact on GNP or the conversion scale in a fixed trade framework. All things considered, the exchange parity, unemployment, and interest rates all continue as before also. Monetary arrangement gets incapable as an approach apparatus in a fixed conversion standard framework.

- Expansionary fiscal strategy causes an increment in GNP while keeping up the fixed conversion scale and consistent interest rates. The exchange parity and unemployment are both diminished.

- Contractionary fiscal arrangement lessens GNP while keeping up the fixed conversion scale and consistent interest rates. The exchange parity and unemployment both ascent.

- A serious cheapening brings down the cash worth and causes an expansion in GNP. Unemployment falls, interest rates continue as before, and the exchange balance rises.

- A money revaluation raises the cash worth and causes a lessening in GNP. Unemployment rises, interest rates continue as before, and the exchange balance falls.

- Monetary extension by the hold money nation powers the local nation to run a parity of installments surplus to keep up its fixed conversion scale. The subsequent cash flexibly increment causes residential interest rates to tumble to keep up fairness with the falling outside interest rates. Residential GNP stays fixed, as do unemployment and the exchange balance.

Fixed Exchange Rates Real Interest Rate r IS LM due to changes in foreign exchange reserves and the money supply ZZ LM un Yr Output Income and Employment The price level adjusts to change the real exchange rate until the is curve crosses the ZZ ine at the full employment level of output