1. a. Explain the macroeconomic effects of a monetary expansion in a small country with perfect capital mobility.
b. Explain the macroeconomic effects of a monetary expansion in a small country with zero capital mobility.
Ans ) A small country with perfect capital mobility means a country that does not effect the world interest rate here the investors investment is dependent on the prevailing interest rate in the domestic country as these foreign investors will invest in the country with high interest rate as compare to the country with low interest rate as the capital is perfectly mobile.So the foreign investors will invest in those countries that yields higher return and which intern depend upon perfect mobility of capital and World interest rate here it is to be noted that perfect capital mobility implies capital is internationally allowed to flow without restriction.If there is expansionery monetary policy in a country as the economy has more liquidity because of lowering interest rate hence the World interest rate is higher than domestic interest rate the foreign investors will do capital outflow for earning higher return in the other countries.
Ans 2) If the mobility of capital is zero than foreign investors will not be able to take the advantage of higher interest rates in some other countries.As a result there would not be the effect of foreign capital outflow and return on investment will be based on solely on interest rate but there is no perfect mobility of capital hence to attract investment interest rate is to be made high as compared to world interest rate.
1. a. Explain the macroeconomic effects of a monetary expansion in a small country with perfect capital mobility. b. Explain the macroeconomic effects of a monetary expansion in a small country with z...
1. a. Explain the macroeconomic effects of a monetary expansion in a small country with perfect capital mobility. b. Explain the macroeconomic effects of a monetary expansion in a small country with zero capital mobility.
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....
Problem 3 (4 points) a) Assume that a country is characterised by a small capital mobility and a flexible exchange rate. The government has increased fiscal transfers. Show the new short run equilibrium, referring to the Mundell-Fleming model. What will happen with exchange rate? Answer using appropriate graphs. (1,5p) b) Assume now that the country has "big but not perfect" capital mobility. Repeat a (start from equilibrium). Under which case -"a" or "b" will fiscal policy be more expansionary? Why?...
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...
13. A small open economy with perfect capital mobility is characterized by all of the following except that: A) its domestic interest rate always exceeds the world interest rate. B) it engages in international trade. its net capital outflows always equal the trade balance. D) its government does not impede international borrowing or lending,
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.
Macroland is a small open economy with perfect capital mobility and a fixed-exchange-rate system. Macroland is initially in the long-run equilibrium at the natural level of output with balanced trade. With the help of an appropriate diagram, compare the impact of a tax cut in the short run (when prices are fixed) and in the long run (when prices are flexible) on: 1. Output, 2. Consumption, 3. Investment, 4. Net exports 5. Exchange rate.
Which of the following statements about a country with a fixed exchange rate and perfect capital mobility is not correct? (a) Shocks to aggregate demand lead to large changes in output. (b) Domestic interest rates must match interest rates in other countries. (c) Inflation targeting works well. (d) Monetary policy cannot be used to stabilize the economy. What of the following statements about the first thing that firms do in response to a fall in demand is correct? (a) Reduce...
Suppose the small open economy Iceland has perfect financial capital mobility and no risk premium. Some of their information is: C = 150 + 0.60(Y – T) – 25r I = 200 – 75r d) Draw two diagrams depicting long-run equilibrium, one for the domestic loanable funds market in Iceland and one for the foreign exchange market. In each diagram clearly label the initial long-run equilibrium from part A/B & the both new long-run equilibria from part C. Has the...
please answer clearly thanks 2. Consider an open economy with perfect capital mobility. Analyze the effects of an increase in public spending G (AG> O) in the following cases: i. Flexible exchange rate [5p] ii. Fixed exchange rate [5p] Consider the effects on income, consumption, investments, interest rate, net exports, and exchange rate. Outline the main differences between the previous two cases