Under fixed exchange rates and with imperfect capital mobility, why would the central bank choose to...

Under fixed exchange rates and with imperfect capital mobility, why would the central bank choose to sterilise the effects of balance of payments surpluses or deficits on the domestic money supply? Explain your answer with an appropriate graph.

Expert Solution

Rahul Sunny answered 2 years ago

Suppose the domestic central bank maintains a fixed exchange rate and free capital mobility. Assume that...

Suppose the domestic central bank maintains a fixed exchange rate and free capital mobility. Assume that the foreign central bank does not change its monetary policy, but the domestic central bank expands credits to the domestic government. What kind of the central bank’s interventions in the foreign exchange market are necessary? Explain also their impacts on the central bank’s balance sheet. Are these impacts the same as those of open market operations? Explain your reasoning.

In an IS-LM model with fixed exchange rates and perfect capital mobility, a cut in government...

In an IS-LM model with fixed exchange rates and perfect capital mobility, a cut in government spending shifts the IS-curve to the left Select one: a. but then the central bank is forced to restrict the money supply, so the LM-curve also shifts to the left b. but then back to the right again because of the resulting increase in net exports c. but then the central bank is forced to expand money supply, so the LM-curve shifts to the...

Assume that you have fixed exchange rates and a SOE with perfect capital mobility. Assume that...

Assume that you have fixed exchange rates and a SOE with perfect capital mobility. Assume that you start from an external imbalance (take the case that r in the internal equilibrium is higher than what it should be). Describe the adjustment to external equilibrium.

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to decrease the...

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to decrease the money supply: Question 21 a) Lead to a lower equilibrium level of income Lead to a higher equilibrium level of income Must be abandoned in order to maintain the fixed exchange rate Must be offset by expansionary fiscal policy None of the above In the Mundell-Fleming model, in a small open economy with a fixed exchange rate, if the government increases government purchases, then...

Fixed exchange rates and monetary policy Consider a group of open economies with perfect capital mobility...

Fixed exchange rates and monetary policy Consider a group of open economies with perfect capital mobility among them. a) Assume that there is a Leader country. All other countries (referred to as the Follower countries) fix their exchange rates to the Leader country. Discuss the effectiveness of monetary policy in the Follower countries. (b) If the Leader country reduces its money supply to fight inflation, what must the Follower countries do to enforce their fixed exchange rates? What is the...

analyze the effect of an expansionary monetary policy under perfect capital mobility and fixed exchange rate...

analyze the effect of an expansionary monetary policy under perfect capital mobility and fixed exchange rate regime on an economy

suppose that a nation has perfect capital mobility and a fixed exchange rate, a negatively sloped...

suppose that a nation has perfect capital mobility and a fixed exchange rate, a negatively sloped IS and positively sloped LM curve. currently the economy is in recession. Should the nation fiscal authority or its central bank take the lead in trying to raise real income? Explain your answer.

Consider the case of a small open economy with a fixed exchange rate, perfect capital mobility...

Consider the case of a small open economy with a fixed exchange rate, perfect capital mobility (i.e., interest parity holds), and complete price stability (no ongoing inflation). Explain what effect a decrease in the world interest rate would have on the following domestic macroeconomic variables: a. The stock of foreign exchange reserves. b. The money supply. c. Real GDP. d. The price level. e. The real exchange rate.

Trilemma Question: Explain why fixed exchange rate regimes which have international capital mobility do not have...

Trilemma Question: Explain why fixed exchange rate regimes which have international capital mobility do not have an independent monetary policy.

5. You are the head of the central bank of a country with a fixed exchange rate...

5. You are the head of the central bank of a country with a fixed exchange rate and open capital markets. Then there is a bad piece of news which you think will cause the currency to depreciate by 20% if you do nothing. a. What are 3 possible responses you can make? Draw FX market diagrams to illustrate your choices. b. Explain how these 3 choices illustrate the trilemma.

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