Assume an open economy with a flexible exchange rate in which there is perfect portfolio capital...

Assume an open economy with a flexible exchange rate in which there is perfect portfolio capital mobility so that the interest parity relation strictly holds. Using the Mundell-Fleming IS-LM model employed in lectures, explain the short-run effects of an expansionary monetary policy on the level of output, the exchange rate and the trade balance. Compare this outcome to that which would occur if instead an expansionary fiscal policy was implemented. Then briefly consider the effectiveness of an expansionary monetary policy under a fixed exchange rate.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

UK is small open economy with a flexible exchange rate regime and perfect capital mobility. Suppose...

UK is small open economy with a flexible exchange rate regime and perfect capital mobility. Suppose that the consumption function shifts down, due perhaps to a worsening of consumer confidence. That is, for every level of disposable income, consumers want to consume less. Explain the direction of the effect of this change on output, consumption, investment, interest rate, net exports and exchange rate.

UK is small open economy with a flexible exchange rate regime and perfect capital mobility. Suppose...

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.

Suppose you live in a small open economy with flexible prices and a flexible exchange rate....

Suppose you live in a small open economy with flexible prices and a flexible exchange rate. A) Suppose that the world interest rate rises. What is the effect of this change on the exchange rate and investment? B) The citizens of your country like to travel abroad. Would the change in the world interest rates affect their cost of spending abroad? C) Suppose that the introduction of more cash machines (in domestic) reduces demand for money (in domestic). Explain how...

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 output, Y. Explain in words. c. What effect is a foreign fiscal expansion likely...

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),

Consider the Mundell-Fleming model of an open economy with a flexible exchange rate regime. Write down...

Consider the Mundell-Fleming model of an open economy with a flexible exchange rate regime. Write down and explain the IS relation, the LM relation, and the uncovered interest parity relation. Represent them on the clearly labeled graph.

Initially, there is a trade surplus in an open economy with a perfect capital mobility and...

Initially, there is a trade surplus in an open economy with a perfect capital mobility and a world interest rate rw. Suppose the government reduces her expenditure. How does the reduction in the government expenditure affect net capital outflow, exchange rate, and net exports? Answer with the aid of the supply-and-demand diagram for the foreign-currency exchange market.

Consider the following open economy in which the real exchange rate is ﬁxed and equal to...

Consider the following open economy in which the real exchange rate is ﬁxed and equal to one. Saving, investment, government spending, taxes, imports and exports are given by: S = −156+0.18Y I = I and G = G (have a horizontal line at the top of two letters on the right side.) T = T0 +0.1Y Q = q1Y and X = X where T0 is the level of autonomous taxes, and q1 is the marginal propensity to import. Let...

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?

Subjects