In the macroeconomic model of the open economy developed in the text, if the central bank...

In the macroeconomic model of the open economy developed in the text, if the central bank increases the money supply, the price level will:

Select one:

a. rise, the real interest rate will rise, the nominal interest rate will rise, the real exchange rate will rise and the nominal exchange rate will rise

b. rise, the real interest rate will be unaffected, the nominal interest rate will rise, the real exchange rate will be unaffected and the nominal exchange rate will rise

c. rise, the real interest rate will be unaffected, the nominal interest rate will be unaffected, the real exchange rate will be unaffected and the nominal exchange rate will be unaffected

d. rise, the real interest rate will be unaffected, the nominal interest rate will rise, the real exchange rate will be unaffected and the nominal exchange rate will fall

Solutions

Expert Solution

Hi,

Hope you are doing well!

Question:

Answer:

d. rise, the real interest rate will be unaffected, the nominal interest rate will rise, the real exchange rate will be unaffected and the nominal exchange rate will fall.

Increasing money supply decrease interest rate and decreasing interest rate increase demand for money. Increasing demand for money increase consumption level and increasing consumption level increase price level. Real interest rate is inflation adjusted interest rate. Here inflation will not affected more so, the real interest rate will be unaffected. increasing price increase inflation then the central bank increase interest rate that increase nominal interest rate. Here both the interest rate and inflation both increase so, the real exchange rate will be unaffected but increasing inflation will decrease the purchasing power of money and currency will get depreciate.

Thank You

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

In the open economy macroeconomic model, which of the following is included in the supply of...

In the open economy macroeconomic model, which of the following is included in the supply of U.S. dollars in the market for foreign-currency? (x) Nebraska Life, a U.S. life insurance company, wants to buy a Japanese government bond. (y) ABC Securities, a U.S. stock brokerage, wants to purchase stock issued by a French corporation. (z) Tony, a U.S. citizen, wants to hold more currency in case of emergencies. A. (x), (y) and (z) B. (x) and (y) only C. (x)...

In the open economy macroeconomic model which of the following is included in the demand for...

In the open economy macroeconomic model which of the following is included in the demand for U.S. dollars in the market for foreign-currency? (x) A retail outlet in Canada wants to buy computers from a U.S. computer manufacturer. (y) ABC Securities, a U.S. stock brokerage, wants to purchase stock issued by a French corporation. (z) A United States bank that has branch offices in Mexico and Canada loans dollars to Tom, a resident of the United States, who wants to...

Imagine are the head of the Central Bank of a Republic, a large open economy with...

Imagine are the head of the Central Bank of a Republic, a large open economy with a floating exchange rate and perfect capital mobility. The government has a large budget deficit and has raised taxes to reduce the deficit. Your goal is to stabilize GDP (income) and change the money supply accordingly. Under your policy, what happens to the money supply, the interest rate, the exchange rate, and the trade balance? Explain and graph your answers using the Mundell-Fleming Model.

6. According to the open economy macroeconomic model, which of the following statements is (are) correct?...

6. According to the open economy macroeconomic model, which of the following statements is (are) correct? (x) The usual effects of capital flight include a rightward shift of demand in the loanable funds market and a rightward shift of the NCO curve, (y) Capital flight typically causes a decrease in the domestic interest rate and an increase in NCO. (z) Capital flight typically causes the real exchange rate of the domestic currency to depreciate because capital flight causes an increase...

4. According to the open economy macroeconomic model, which of the following statements is (are) correct?...

4. According to the open economy macroeconomic model, which of the following statements is (are) correct? (x) Capital flight requires the cooperation of the country’s airlines to move precious metals to safe areas. (y) A large and sudden movement of funds out of a country is called capital flight (z) Capital flight is frequently caused by an increase in political or economic instability. A. (x), (y) and (z) B. (x) and (y) only C. (x) and (z) only D. (y)...

1. Using the Macroeconomic Model of an Open Economy, answer the following questions. What happens to...

1. Using the Macroeconomic Model of an Open Economy, answer the following questions. What happens to each of the following if investment becomes more desirable at each interest rate? The interest rate (rises or falls): Net capital outflow (rises or falls): The exchange rate (rises or falls): 2. Using the Macroeconomic Model of the Open Economy, answer the following questions. What happens to each of the following if people in the U.S. choose to save a smaller percentage of income?...

In the open-economy macroeconomic model, the key determinant of net capital outflow is: A. nominal exchange...

In the open-economy macroeconomic model, the key determinant of net capital outflow is: A. nominal exchange rate B. the real interest rate C. real exchange rate D. nominal interest rate

6.According to the open economy macroeconomic model, which of the following statements is (are) correct? (x)The...

6.According to the open economy macroeconomic model, which of the following statements is (are) correct? (x)The usual effects of capital flight include a rightward shift of demand in the loanable funds marketand a rightward shift of the NCO curve, (y)Capital flight typically causes a decrease in the domestic interest rate and an increase in NCO. (z)Capital flight typically causes the real exchange rate of the domestic currency to depreciate because capital flight causes an increase in the supply of the...

14. According to the open-economy macroeconomic model, which of the following statements is (are) correct? (x)...

14. According to the open-economy macroeconomic model, which of the following statements is (are) correct? (x) In the open-economy macroeconomic model, if for some reason foreign citizens want to purchase more U.S. goods and services at each exchange rate, then the demand for dollars in the market for foreign-currency exchange shifts right. (y) If foreign citizens want to buy fewer U.S. bonds, then the demand for U.S. dollars in the market for foreign currency exchange will shift to the right...

1. Imagine that you run the central bank in a large open economy with a floating...

1. Imagine that you run the central bank in a large open economy with a floating exchange rate. Your goal is to stabilize income, and you adjust the money supply accordingly. Under your policy, what happens to the money supply, the interest rate, the exchange rate, and the trade balance in response to each of the following shocks: A. The government raises taxes to reduce the budget deficit B. The government restricts the import of foreign cars

Subjects