P4 3. Using the AA-DD model, explain: (a) why a temporary increase in the money supply raises output and the ex change rate; (b) why the effects of a permanent increase in the money supply are different from (a)
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- How would a contractionary monetary policy affect the exchange rate, net exports, aggregate demand, and aggregate supply?Suppose that political unrest in Egypt leads financial markets to anticipate a depreciation in the Egyptian pound. How will that affect the demand for pounds. supply of pounds, and exchange rate for pounds compared to, say, U.S. dollars?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.
- 1. Suppose in the New Keynesian open-economy model that there is a negative output gap andthe central bank decreases the current money supply.(a) Assuming that the exchange rate is flexible. Draw diagrams for the labour, goods andmoney markets, and the production function. Determine the equilibrium effects of thisdecrease in the money supply on employment, output, consumption, investment, money,real wages, the real interest rate, the price level and the exchange rate. Provide a detailedeconomic analysis explaining your results with the aid of the diagrams.(b) Repeat part (a) for the case of a fixed exchange rate.Figure: Foreign Exchange Markets Spom 区区 Dwon D, Q Reference: Ref 12-3 (Figure: Foreign Exchange Markets) Look at the figures in the Foreign Exchange Markets graphs. Suppose there was an increase in the domestic level of Government spending. The resulting changes would be: an increase in the demand for dollars and and a fall in the supply of foreign currency. a decrease in the supply of dollars and a rise in the supply of foreign currency. O an increase in the of supply of dollars and an increase in the demand for foreign currency. a decrease in the demand for dollars and decrease in the demand for foreign currency.Question 10 d Anwser only question d please thank you 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. (d) Forex speculators believe that the Pound sterling will depreciate.
- . Assume that the US economy expands and that the US Federal Reserve Bank, worried by rising inflation, decides to raise interest rates. Which of the following would not occur? A) The US dollar will appreciate. B) Interest rates in other countries will fall. C) The current account of the US's trading partners will improve. D) There will be a fall in US exports.15. 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?4. Use the Mundell-Fleming model to predict what would happen to real GDP, the exchange rate, and net exports under both floating and fixed exchange rate regimes in response to each of the following shocks. Your answers should be in the form of fully-labeled graphs, where any curve shifts and new equilibrium are clearly shown. (a) Consumer confidence in the economy is falling, so consumers start to spend less. (b) Toyota designed a line of stylish new cars, making consumers prefer foreign cars over domestic cars. Banks double the number of ATMs (automatic teller machines) around the economy, reducing the demand for money.
- N N QUESTION 3 Consider the exchange rate between U.S. Dollar and Mexican Peso: USD/MXN. Initially, the supply curve for USD is 100+ e bln dollars per week and the demand curve is 140-e 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-e and the supply of dollars falls to 99+ e How should the central 'N' bank of Mexico react to this change? N O A. start selling U.S. dollars to support the exchange rate O B. start buying U.S. dollars to support the exchange rate O C. reduce money supply in the economy O D. do nothingc. Consider a period when, prior to euro entry, the central bank of Lithuania maintained an exchange rate band relative to the euro-at the time this was a prerequisite for joining the Eurozone. The rules said that Lithuania had to keep its exchange rate within ±15% of the central parity of 3.4528 litas per euro. Compute the exchange rate values corresponding to the upper and lower edges of this band. Suppose PPP holds. Assuming Eurozone inflation was 2% per year and inflation in Lithuania was 6%, compute the PPP-implied rate of depreciation of the lita. Could Lithuania maintain the band requirement? For how long? Does your answer depend on where in the band the exchange rate currently sits? A primary objective of the European Central Bank is price stability (low inflation) in the current and future Eurozone. Is an exchange rate band a necessary or sufficient condition for the attainment of this objective?2. Consider a country operating under fixed exchange rates, with aggregate demand and aggregate supply given by equa- tions (21.1) and (21.2). AD: Y = Y AS:P = P(1 + m) F(1 - -) Assume that the economy is initially in medium-run equi- librium, with a constant price level and output equal to the naturallevel of output. Foreign output, the foreign price level, and the foreign interest rate are fixed throughout the problem. Assume that expected (domestic) inflation remains constant throughout the problem. a. Draw an AD-AS diagram for this economy. b. Now suppose there is an increase in government spend- ing. Show the effects on the AD-AS diagram in the short run and the medium run. How do output and the price level change in the medium run? c. What happens to consumption in the medium run? d. What happens to the real exchange rate in the medium run? [Hint: Consider the effect on the price level you iden- ti fied in part (b).] What happens to net exports in the me- dium run? e. Given that…
