Chapter 8) Suppose country A pegs its currency to country B (i.e., country B is the...

Chapter 8) Suppose country A pegs its currency to country B (i.e., country B is the center country). Suppose country A is in recession. To help country A, what does the country B’s Central Bank can do? As a result, what happens to IS and LM curves in both countries? (Use graphs to explain)

Solutions

Expert Solution

Consider the given problem here there are two country “A” and “B” both of them is in equilibrium at Ea and Eb respectively.

Now, to increase the level of output of countryA, country can take expentionary monetary policy. So, the LM of country B will shift to right side to LMb2 and the equilibrium level of income increases to Yb2 and the interest rate decreases to rb2. Now, as the interest rate of countryB decreases but for countryA remains same at ra1. So, there will be massive capital inflow in countryA, that increase the supply of foreign exchange. Now, under the fixed exchange rate regime there will be excess supply of foreign exchange, => central bank of A have to buy the excess amount of foreign exchange reserve in exchange money. So, the money supply of A also increases and the LMa shift right to LMa2. So, the equilibrium interest rate decreases to ra2 and the income increases to Ya2.

So, by using monetary policy B can increase the output of A.

Rahul Sunny answered 1 week ago

Next > < Previous

Related Solutions

Suppose that country A pegs its currency to country B’s currency, and A has excessively high...

Suppose that country A pegs its currency to country B’s currency, and A has excessively high inflation. Country B is only likely to help A if: a. both are members of the International Monetary Fund. b. country B has a free trade agreement with country A. c. country B’s output is above its preferred level. d. country B does not trade at all with country A. e. country B’s output is below its preferred level.

If a country ties its currency to a specific foreign currency and allows its holdings of...

If a country ties its currency to a specific foreign currency and allows its holdings of that currency to govern the country's money supply, this arrangement is known as a Select one: a. currency board. b. floating exchange rate. c. monetary union. d. Special Drawing Right.

6. Suppose a country wants to fix the exchange rate of its domestic currency higher than...

6. Suppose a country wants to fix the exchange rate of its domestic currency higher than what markets alone would bring about. (a) Suppose the central bank officially sets the higher-than-market exchange rate for the domestic currency, but otherwise undertakes no action. Which would result, a surplus of the currency or a shortage of the currency? (b) Suppose the central bank does undertake an action to achieve its desired fixed exchange rate. Which would the central bank do, buy the...

Explain why the degree of capital mobility might affect the sustainability of ‘soft’ currency pegs and...

Explain why the degree of capital mobility might affect the sustainability of ‘soft’ currency pegs and ‘hard’ currency pegs.

Country A Country B Soybeans 6 12 Textiles 6 8 Suppose that wb=Peso 1000 and e=2...

Country A Country B Soybeans 6 12 Textiles 6 8 Suppose that wb=Peso 1000 and e=2 (e is the exchange rate). What is the maximum level of wa (expressed in $) such that these 2 countries trade according to Comparative Advantage? a) 1500 b) 2666 c) 4000 d) 8000

In Chapter 8, we saw that ATP is the currency of the cell, powering almost all...

In Chapter 8, we saw that ATP is the currency of the cell, powering almost all the work carried out in a typical cell. In almost all eukaryotes and aerobic prokaryotes, the majority of this ATP is synthesized from the flow of stored hydrogen ions (protons) in the form of a proton gradient. This week’s forum will explore the universality of proton gradients and provide insight into the role they may have played in the origin of life itself and...

When a country depreciates its currency then _ in the short run. A.)imports will decrease and...

When a country depreciates its currency then _ in the short run. A.)imports will decrease and exports will decrease. B.) imports will increase and exports will increase. C.) imports will decrease and exports will increase. D.) exports will increase but imports will not be affected.

Assume the country of Sluban ties its currency (the slu) to the dollar and the exchange...

Assume the country of Sluban ties its currency (the slu) to the dollar and the exchange rate will remain fixed. Sluban has frequent trade with countries in the eurozone and the United States. All traded products can easily be produced by all the countries, and the demand for these products in any country is very sen- sitive to the price because consumers can shift to wherever the products are relatively cheap. Assume that the euro depreciates substantially against the dollar...

define the following: 9. Crawling pegs 10. Currency board 11. Speculative attack 12. Secular stagnation

Country A can produce every good more efficiently (i.e., at lower cost) than country B. Therefore,...

Country A can produce every good more efficiently (i.e., at lower cost) than country B. Therefore, A. Country A should not trade with country B for any goods. B. Country B should lower its production costs so that it has some goods that it can trade to country A. C. Country A should trade with country B, but only for those goods for which country B has an absolute advantage. D. Country A should trade with country B, but only...

Subjects