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 to have on foreign output, Y^*, and on the foreign interest rate, i^*? What effect is a foreign monetary expansion likely to have on Y^* and i^*?

d. Given your answers to parts (a), (b), and (c), how does a foreign fiscal expansion affect domestic output? How does a foreign monetary expansion affect domestic output? (Hint: One of these policies has an ambiguous effect on output.)

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Consider an open economy operating under flexible exchange rates. Assuming that both the domestic and foreign...

Consider an open economy operating under flexible exchange rates. Assuming that both the domestic and foreign prices are constant, the economy's short-run behavior can be described by the following IS, LM and interest-parity equations: Y = C(Y-T)+I(Y,i)+G+NX(Y,Y*,E) i = i (i equals to i bar) E = ((1+i)/(1+i*))Ee The notation is standard except for the policy interest rate which is denoted by i (Moodle doesn't have the over-bar). The expected exchange rate Ee, foreign output Y* and the foreign interest...

Consider an open economy operating under flexible exchange rates. Assuming that both the domestic and foreign...

Consider an open economy operating under flexible exchange rates. Assuming that both the domestic and foreign prices are constant, the economy's short-run behavior can be described by the following IS, LM and interest-parity equations: Y = C(Y-T)+I(Y,i)+G+NX(Y,Y*,E) i = i E = ((1+i)/(1+i*)Ee The notation is standard except for the policy interest rate which is denoted by i (Moodle doesn't have the over-bar). The expected exchange rate Ee, foreign output Y* and the foreign interest rate i* are taken to...

Consider an open economy operating under flexible exchange rates. Assuming that both the domestic and foreign...

Consider an open economy operating under flexible exchange rates. Assuming that both the domestic and foreign prices are constant, the economy's short-run behavior can be described by the following IS, LM and interest-parity equations: Y = C(Y-T)+I(Y,i)+G+NX(Y,Y*,E) i = i E = ((1+i)/(1+i*)Ee The notation is standard except for the policy interest rate which is denoted by i (Moodle doesn't have the over-bar). The expected exchange rate Ee, foreign output Y* and the foreign interest rate i* are taken to...

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 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?

Consider an open economy with flexible exchange rates. Suppose that policy makers are happy with the...

Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity...

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) and the exchange rate (E), when the domestic central bank leaves the policy interest rate unchanged. 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) and the exchange rate...

Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity...

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) and the exchange rate (E), when the domestic central bank leaves the policy interest rate unchanged. 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) and the exchange rate (E),...

Consider a monetary contraction in an economy operating under flexible exchange rates. Discuss the effects on...

Consider a monetary contraction in an economy operating under flexible exchange rates. Discuss the effects on consumption, investment and net exports. Explanation in words as well as use of graphs are required

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.

Subjects