Question

In: Economics

Consider a small open economy that maintains a fixed exchange rate. Explain what effects a reduction...

Consider a small open economy that maintains a fixed exchange rate. Explain what effects a reduction in the interest rate that prevails in world financial markets would have on each of the following domestic variables after the economy has adjusted to a new equilibrium: (i) Real GDP (ii) Domestic interest rate (iii) Central bank’s stock of foreign exchange reserves (iv) Real exchange rate (v) Current and non-reserve financial accounts of the balance of payments

Solutions

Expert Solution


Related Solutions

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.
Explain why an expansionary fiscal policy is effective for a small open economy with fixed exchange rate.
Explain why an expansionary fiscal policy is effective for a small open economy with fixed exchange rate.Explain why an expansionary fiscal policy is not effective for a small open economy with flexible exchange rate.
Consider the following open economy (Home economy). The real exchange rate is fixed and equal to...
Consider the following open economy (Home economy). The real exchange rate is fixed and equal to one. Saving, investment, government spending, taxes, imports and exports are given by: 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 to designate variables related to the foreign economy. Assume Foreign economy has the same equations as Home...
3. Explain why an expansionary monetary policy is not useful for a small open economy with fixed exchange rate.
3. Explain why an expansionary monetary policy is not useful for a small open economy with fixed exchange rate.4.Explain why an expansionary monetary policy is effective for a small open economy with flexible exchange rate.
The small open economy of Hundred Acre Wood has a fixed exchange rate and is initially...
The small open economy of Hundred Acre Wood has a fixed exchange rate and is initially in short-run equilibrium. An outbreak of COVID-19 occurs and as a result money demand rises AND autonomous consumption falls. Suppose policy makers would like to keep fluctuations in the unemployment rate as small as possible, this implies the best policy reaction would be to: a) increase the money supply (only) b) Increase taxes (only) c) Increase the money supply, cut taxes and cut government...
Suppose a large open economy with fixed exchange rate.
Suppose a large open economy with fixed exchange rate.A. What happens to income, interest rate in response to a fiscal expansion?B. What happens to income and interest rate if the central bank expands money supply by buying bonds from the public?
Explain the J-curve phenomenon. Consider an economy with a fixed exchange rate with a fixed price...
Explain the J-curve phenomenon. Consider an economy with a fixed exchange rate with a fixed price level. What is the effect of depreciation on equilibrium income and trade balance after the first six months of depreciation?
Explain the J-curve phenomenon. Consider an economy with a fixed exchange rate with a fixed price...
Explain the J-curve phenomenon. Consider an economy with a fixed exchange rate with a fixed price level. What is the effect of depreciation on equilibrium income and trade balance after the first six months of depreciation?
Explain how expansionary fiscal policy impacts a small open economy with a floating exchange rate; and...
Explain how expansionary fiscal policy impacts a small open economy with a floating exchange rate; and compare that to how expansionary fiscal policy works for a country with a fixed exchange rate
Explain the effects of fiscal policy on output and employment in an open economy with fixed...
Explain the effects of fiscal policy on output and employment in an open economy with fixed exchange rates.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT