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- Is a country for which imports and exports comprise a large fraction of the GDP more likely to adopt a flexible exchange rate or a fixed (hard peg) exchange rate?1. Write true or false to each on of these affirmations () A devaluation of the exchange rate does not affect the equilibrium of the general aggregate supply and demand model.2. Suppose a currency is temporarily undervalued by a fixed exchange rate system, such as the international gold standard. Let that currency be the US dollar, and expressed in terms of British pounds. a. Show this disequilibrium using a supply and demand graph. Be sure to carefully label your axes. b. Clearly explain how one could profit by arbitraging in dollars using a bill of exchange. If it helps, you can use a numerical example.
- 1. Use the long run model of real exchange rate determination for the small open economy to predict what would happen to the trade balance and the real exchange rate in response to each of the following events. a. A sudden decline in the popularity of Tesla (which is an American company) leads to a reduction in the sale of Tesla cars abroad. b. A strong surge in demand results from the reopening of the economy post covid-19 pandemic. Assume that this surge in demand is persistent.20. For this question, assume that policy makers are pursuing a fixed exchange rate regime. Now suppose a budget is passed that calls for a reduction in government spending. This reduction in government spending will cause which of the following to occur? A) a reduction in i and an increase in E B) a reduction in investment C) no change in output D) no change in net exports E) an increase in imports15. 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?
- Question 10 a b and c Assume that there is a free-floating exchange rate. Will the following cause sterling toappreciate or depreciate relative to other currencies? In each case, you should considerwhether there is a shift in the demand or supply curves of sterling (or both) and whichway the curve(s) shift(s). You may assume that the impacts are ceteris paribus, that is,everything else remains the same. Illustrate your answers and give a short explanation interms of currency supply and demand. (a) UK imports increase. (b) UK interest rates rise relative to those abroad.(c) The UK experiences lower inflation than other countries, but with no change in interestrates.The benefits of adopting a flexible exchange rate is that, a.in response to shocks to the demand for Australian exports, the value of the currency would adjust to moderate these effectsb. changes in the interest rate will have no effect on the exchange rate that is determined in the foreign exchange market c.the exchange rate can be more volatile d. an economy will be able to well predict the prices of exports and imports Why A is the correct answer? What is meant by a flexible exchange rate?In an open economy, a permanent beneficial suply shock (s< 0)implie tha the domestic real exchange rate wil: Oappreciate as the est of the word buys the domestic curency Oremain unchanged because of fsetig movements n he domestic prie level Oremain unchanged because of ffseting movements in realinteret rates Odepreciate so as to crowd-in net exports
- 6. Assume the U.S. is a SMALL open economy and has balanced trade. Suppose Congress is worried about the U.S. economy entering a recession following the outbreak of COVID-19, and as a result decreases taxes for households. a. Using the LF model, illustrate and describe the effect of this policy on the U.S. trade balance. b. Using the net exports model, illustrate and describe the effect of this policy on the U.S. real exchange rate.14. Today many Central Banks around the World are thinking of Increasing interest rates. Why? What could be the dangers of increasing those interest rates too much? 15. What will happen to the trade balance and the real exchange rate of a small open economy when govenment purchases increase, such as during a war? Does your answer depend on whether this is a local war or a global war? On those grounds, In the current situation of the Russian invasion, what should happen between the dollar and the Euro?Give typing answer with explanation and conclusion Consider the exchange rate between U.S. Dollar and Mexican Peso: USD/MXN. Initially, the supply curve for USD is 100 + eN bln dollars per week and the demand curve is 140 - eN bln dollars per week. There is a financial crisis in Mexico and the government fears that it may lead to capital outflows that would make the crisis even worse. They decide that if Mexican Peso depreciates by more than 20% the central bank will step in and fix the exchange rate. As the crisis unfolds the demand for the U.S. dollars increases to 142 - eN and the supply of dollars falls to 99 + eN. How should the central bank of Mexico react to this change?