Review the IS and LM model in a large open economy, what is the currency realignment...

Review the IS and LM model in a large open economy, what is the currency realignment in 1985 when the Reagan Administration implemented its stimulus policy.

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Rahul Sunny answered 2 years ago

Q2. Mundell-Fleming model. Consider an open economy IS-LM model. China's currency is the “Chinese Yuan Renminbi...

Q2. Mundell-Fleming model. Consider an open economy IS-LM model. China's currency is the “Chinese Yuan Renminbi (CNY)" and the USA's currency is the “US dollar (USD)". China has a fixed exchange rate regime with respect to USD. The central bank of China maintains a peg of 1 CNY=0.14 USD. The interest rate in the USA is 2.5%. a. What do the above facts imply about the interest rate in China? Explain. b. Suppose that the USA experiences an increase in...

Q2. Mundell-Fleming model. (10 marks) Consider an open economy IS-LM model. China's currency is the “Chinese...

Q2. Mundell-Fleming model. Consider an open economy IS-LM model. China's currency is the “Chinese Yuan Renminbi (CNY)" and the USA's currency is the “US dollar (USD)". China has a fixed exchange rate regime with respect to USD. The central bank of China maintains a peg of 1 CNY=0.14 USD. The interest rate in the USA is 2.5%. a. What do the above facts imply about the interest rate in China? Explain. (2 points) b. Suppose that the USA experiences an...

Compare the Closed-Economy IS-LM model, an Open-Economy IS-LM-BP model in which exchange rates are allowed to...

Compare the Closed-Economy IS-LM model, an Open-Economy IS-LM-BP model in which exchange rates are allowed to float freely, and an Open-Economy IS-LM-BP model in which exchange rates are held constant by the central bank. Specifically, use the three models to explain, and compare, the effects on GDP, interest, and the exchange rate of the national currency of: a. A sudden increase in government expenditures. b. A sharp increase in the discount rate and a massive sale of Treasury bonds by...

IS-LM Model (Closed Economy) The following equations describe a small open economy. [Figures are in millions...

IS-LM Model (Closed Economy) The following equations describe a small open economy. [Figures are in millions of dollars; interest rate (i) is in percent]. Assume that the price level is fixed. Goods Market C = 250 + 0.8YD YD = Y + TR – T T = 100 + 0.25Y I = 300 – 50i G = 350; TR = 150 Money Market L = 0.25Y – 62.5i Ms/P = 250 Goods market equilibrium condition: Y = C +...

Using the IS-LM-FE model for a small open economy, analyze the effects of a contractionary monetary...

Using the IS-LM-FE model for a small open economy, analyze the effects of a contractionary monetary policy on output and the real interest rate in the short run and the long run. In each case, discuss the differences between the classical and the Keynesian models.

Classical small open economy model: According to the Classical small open economy model, what happens to...

Classical small open economy model: According to the Classical small open economy model, what happens to domestic national saving, investment, the trade balance, and the real exchange rate in response to each of the following events? Draw a loanable funds market diagram and a net exports diagram to illustrate your answer in each case. (For these diagrams, let’s assume that the country starts out running a current account surplus and capital account deficit, as in the examples in class.) a)...

Large Open Economy Large Open Economy: Political instability in Mexico in 1994.Discuss and explain what happens...

Large Open Economy Large Open Economy: Political instability in Mexico in 1994.Discuss and explain what happens with words (abbreviations and arrows are fine) and with graphs (market for loanable funds and market for foreign currency) Case 1: what happens to NFI, r, NX and real exchange rate in the US. Case 2: what happens to NFI, r, NX and real exchange rate in Mexico

please compare and explain the IS-LM curve in a closed economy and a small open economy

Suppose there is an exogenous increase in investment. Use the large open economy model to answer...

Suppose there is an exogenous increase in investment. Use the large open economy model to answer the following: 1. Will the domestic real interest rate change? Explain. 2. Does this shock affect net capital outflows? Explain why or why not. 3. What happens to the value of the domestic currency in the foreign exchange market? Why does the value of the domestic currency change? 4. Will net exports change? Why or why not? 5. Will domestic investment change? Why or...

Suppose there is an exogenous increase in taxes,. Use the large open economy model to answer...

Suppose there is an exogenous increase in taxes,. Use the large open economy model to answer the following: 1. Does this shock affect national saving? Explain. 2. Does this shock affect net capital outflows? Explain why or why not. 3. What happens to the value of the domestic currency in the foreign exchange market? Why does the value of the domestic currency change? 4. Will net exports change? Why or why not? 5. Will the domestic real interest rate change?...

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