Question
In: Economics
Consider the determination of real exchange rates in a large open economy with a flexible exchange...
Consider the determination of real exchange rates in a large open economy with a flexible exchange rate regime. If today’s technology increase, e* will (increase/decrease/stay/none). If tomorrow’s technology is expected to improve, e* will (increase/decrease/stay/none) . If M decreases, e* will (increase/decrease/stay/none). If the government decreases G1 while keeps G2 unchanged, e* will (increase/decrease/stay/none),
Solutions
Expert Solution
a).
If the today’s technology increases that will increase AS, => the price level decreases. Now, the exchange rate in the ratio of “home price” to “foreign price”, => as the home price decrease given the foreign price that the exchange rate decreases.
b).
If the tomorrow’s technology is expected to improve, that will induce people to reduce their expectation, => the price level decreases. Now, the exchange rate in the ratio of “home price” to “foreign price”, => as the home price decrease given the foreign price that the exchange rate decreases.
c).
The decrease in money supply, decrease the price level. Now, the exchange rate in the ratio of “home price” to “foreign price”, => as the home price decrease given the foreign price that the exchange rate decreases.
d).
If the home government decreases its spending and the foreign government spending remains same, => the home price decreases. Now, the exchange rate in the ratio of “home price” to “foreign price”, => as the home price decrease given the foreign price that the exchange rate decreases.
Rahul Sunny answered 7 months agoRelated Solutions
IV. Flexible exchange rates and foreign macroeconomic events Consider an open economy with flexible exchange rates....
IV. Flexible exchange rates and foreign macroeconomic events
Consider an open economy with flexible exchange rates. Let UIP
stand for the uncovered interest parity condition.
a. In an IS-LM-UIP diagram, show the effect of an increase in
foreign output, Y*, on
domestic output, Y. Explain in words.
b. In an IS-LM-UIP diagram, show the effect of an increase in
the foreign interest rate, i*, on domestic
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c. What effect is a foreign fiscal expansion likely...
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Consider an open economy with flexible exchange rates. Suppose
that policy makers are happy with the level of output (unemployment
is at the natural rate) but that a large trade surplus has been
provoking complaints from other countries.
What kind of fiscal and/or monetary policy would you recommend
in order to reduce the trade surplus while keeping output
unchanged?
Consider an open economy with flexible exchange rates. Suppose that policy makers are happy with the...
Consider an open economy with flexible exchange rates. Suppose
that policy makers are happy with the level of output (unemployment
is at the natural rate) but that a large trade surplus has been
provoking complaints from other countries.
What kind of fiscal and/or monetary policy would you recommend in
order to reduce the trade surplus while keeping output
unchanged?
Consider an open economy operating under flexible exchange rates. Assuming that both the domestic and foreign...
Consider an open economy operating under flexible exchange
rates. Assuming that both the domestic and foreign prices are
constant, the economy's short-run behavior can be described by the
following IS, LM and interest-parity equations:
Y = C(Y-T)+I(Y,i)+G+NX(Y,Y*,E)
i = i (i equals to i bar)
E = ((1+i)/(1+i*))Ee
The notation is standard except for the policy interest rate which
is denoted by i (Moodle doesn't have the over-bar). The expected
exchange rate Ee, foreign output Y* and the foreign interest...
Consider an open economy operating under flexible exchange rates. Assuming that both the domestic and foreign...
Consider an open economy operating under flexible exchange
rates. Assuming that both the domestic and foreign prices are
constant, the economy's short-run behavior can be described by the
following IS, LM and interest-parity equations:
Y = C(Y-T)+I(Y,i)+G+NX(Y,Y*,E)
i = i
E = ((1+i)/(1+i*)Ee
The notation is standard except for the policy interest rate
which is denoted by i (Moodle doesn't have the over-bar).
The expected exchange rate Ee, foreign output
Y* and the foreign interest rate
i* are taken to...
Consider an open economy operating under flexible exchange rates. Assuming that both the domestic and foreign...
Consider an open economy operating under flexible exchange
rates. Assuming that both the domestic and foreign prices are
constant, the economy's short-run behavior can be described by the
following IS, LM and interest-parity equations:
Y = C(Y-T)+I(Y,i)+G+NX(Y,Y*,E)
i = i
E = ((1+i)/(1+i*)Ee
The notation is standard except for the policy interest rate
which is denoted by i (Moodle doesn't have the over-bar).
The expected exchange rate Ee, foreign output
Y* and the foreign interest rate
i* are taken to...
Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity...
Consider an open economy with flexible exchange rates. Let UIP
stand for the uncovered
interest parity condition.
a. In an IS-LM-UIP diagram, show the effect of an increase in
foreign output, Y*, on domestic
output (Y) and the exchange rate (E), when the domestic central
bank leaves the policy
interest rate unchanged. Explain in words.
b. In an IS-LM-UIP diagram, show the effect of an increase in
the foreign interest rate, i*, on
domestic output (Y) and the exchange rate...
Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity...
Consider an open economy with flexible exchange rates. Let UIP
stand for the uncovered
interest parity condition.
a.In an IS-LM-UIP diagram, show the effect of an increase in
foreign output, Y*, on domestic
output (Y) and the exchange rate (E), when the domestic central
bank leaves the policy
interest rate unchanged. Explain in words.
b. In an IS-LM-UIP diagram, show the effect of an increase in
the foreign interest rate, i*, on
domestic output (Y) and the exchange rate (E),...
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S = -60 + 0.18Y
I = I
G = G
T = T0 + 0.1Y
Q = 0.1Y
X = 0.1Y*
where T0 is the level of autonomous taxes, and an asterisk is used
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