4. What would be the effect on the aggregate demand curve of an increase in U.S. autonomous net exports? Would an increase in net exports affect the monetary policy curve? Explain why or why not.
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- A central bank can allow its currency to fall indefinitely, but it cannot allow its currency to rise indefinitely. Why not?What are some of the reasons a central bank is likely to care, at least to some extent, about the exchange rate?If a countrys currency is expected to appreciate in value, what would you think will be the impact of expected exchange rates on yields (e.g., the Interest rate paid on government bonds) in that country? Hint: Think about how expected exchange rate changes and interest rates affect a currencys demand and supply.
- We learned that changes in exchange rates and the corresponding changes in the balance of trade amplify monetary policy. From the perspective of a nations central bank, is this a good thing or a bad thing?What would be the effect of an increase in U.S. netexports on the aggregate demand curve? Would anincrease in net exports affect the monetary policy curve?ExplainIf the Fed lowers the federal funds rate so that the exchange rate falls, then imports ________ and exports ________. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease
- If the Fed raises the federal funds rate so that the exchange rate rises, then imports ________ and exports ________. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease15. Why do exchange rates frequently violate the theory of PPP? To what extent does this diminish the theory's usefulness for understanding exchange rate determination?Clearly explain the transmission mechanism of a change in the rate of interest on a country’s Balance of Trade. Assume that you are analyzing this mechanism in the case of a country that has an open economy (trades with the rest of the world) and that the monetary authorities decide to lower the rate of interest ‘r’ to stimulate real output and employment. To begin with, assume that this country is operating at less-than full employment. How does a fall in ‘r’ affect a country that is a net exporter ? What would happen if this country is a net importer ? Finally, how does a fall in ‘r’ affect the rate of inflation, other things being constant ?
- 1. Under what circumstances would the Federal Reserve Board seek to expand the money supply? What tools would it use to do? 2. What are three major differences between the Classical and Keynesian Models of the economy? 3. Differentiate between tariffs and quotas. Explain the effect of each on international trade. Why would governments want to impose tariffs and quotas? 4. Differentiate between fixed and floating exchange rates. How would a country maintain fixed exchange rates? 5. What is the Crowding Out effect of fiscal policy? What are its likely consequences?Because Vin’s receives payments in British pounds every month and converts those pounds into euros, it needs to closely monitor the value of the British pound in the future. David Hewson, owner of Vin’s, expects that inflation will rise substantially in the UK, while inflation in Ireland will remain low. He also expects that the interest rates in both countries will rise about the same amount. a. Given David’s expectations, forecast whether the pound will appreciate against the euro over time. b. Given David’s expectations, will Vin’s be favourably or unfavourably affected by the future changes in the value of the poundOver the last 10 years, the dollar has depreciated sharply vis-à-vis the euro. Suppose that in the short run the Fed wanted both to defend the dollar (that is, stop its decline and/or cause it to appreciate) and stimulate investment. Can it achieve both of these goals simultaneously through monetary policy? A. Yes, to stimulate investment the Fed will use expansionary policy that will raise interest rates. The higher interest rates will reduce investment into the United States, which will decrease the demand for dollars and cause an appreciation of the dollar. B. No, to stimulate investment the Fed will use expansionary policy that will lower interest rates. The lower interest rates, however, will reduce investment into the United States, which will increase the supply of dollars and cause a depreciation of the dollar. C. No, to stimulate investment the Fed will use expansionary policy that will raise interest rates. The higher interest rates, however, will reduce investment into the…