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- Exchange Rate Determination - Short v. Long Run The nominal money demand for the US is given by the following function: Md = L(i)Y P where Md denotes nominal money demand, L(i) is the liquidity preference function, Y denotes real output, and P the price level in the economy. At the same time we can define the liquidity preference function as A L(i) 1+i where A is a parameter and i denotes the nominal interest rate in the US. Assume that the US econ- omy is initially in equilibrium and that P A = 5. With this information answer the following questions: 100, M$ = 100 (nominal money supply), Y = 100, and %3D (i) Plot the liquidity preference function with respect to the nominal interest rate i. What kind of relation do you observe for the two variables? use economic intuition to explain this relation. (ii) What is the nominal interest rate for the US at the initial equilibrium? (iii) Suppose real output contracts by 5%. If prices are rigid, what is the new equilibrium interest rate in the…The Foreign Exchange MarketThe Jamaican dollar experienced a rapid depreciation in the exchange rate during 2020 due to thepandemic's impact on key sectors. The exchange rate in 2020 closed at J$142.65 to US$1.00,after opening the year at J$132.57, resulting in a 7.6 per cent depreciation. As at FridaySeptember 16, 2022, the exchange rate was at approximately $ JA 150 to US $1 Arguments for and against fixed exchange rate.The Foreign Exchange MarketThe Jamaican dollar experienced a rapid depreciation in the exchange rate during 2020 due to thepandemic's impact on key sectors. The exchange rate in 2020 closed at J$142.65 to US$1.00,after opening the year at J$132.57, resulting in a 7.6 per cent depreciation. As at FridaySeptember 16, 2022, the exchange rate was at approximately $ JA 150 to US $1.QUESTIONGiven this rapid depreciation of the Jamaican dollar against the US dollar,should the government of Jamaica adopt a Fixed Exchange Rate regime ormaintain the current Floating Rate regime?Outline to answering the question Clear distinction between fixed exchange rate and floating exchange rate, Examples of countries that uses fixed exchange rate regime and those that uses floatingexchange rate regime and Arguments for and against floating exchange rate
- What does it mean to say that a currency appreciates? Depreciates? Becomes stronger? Becomes weaker?17. If there are no statistical discrepancies, countries with current account deficits must receive net capital inflows. (a) True, because net exports must finance net capital outflows. (b) True, because net imports must be financed by net capital inflows. (c) False, because countries might export less and yet not get any capital inflows to pay their exports hence incur debt. (d) False, because countries might export more and yet not get any cap- ital outflows as they merely accumulate forex reserves 18. Although the export ratio can be larger than one - as it is in Singapore - the same cannot be true of the ratio of imports to GDP. (a) True, you could export more than you can consume, but you cannot import more than you can consume based on your income (b) False, imports can be greater than GDP because trade balance can be negative. (c) False, imports can be greater than GDP because excess exports can help finance imports. (d) True, you could export more than you can produce, but you…Question 3 The yen is very strong against the US dollar due to increased supply of dollars and hasmoved from 120 yen/$1 to 105 yen/$1. The Bank of Japan decides to intervene by sellingyen and buying US dollars. The intervention is of the non sterilized kind. Using a diagramfor the supply and demand for dollars in the forex market, illustrate and comment on theintervention undertaken by the Bank of Japan. On a separate diagram show the impactof the intervention on the overall Japanese yen money supply and demand conditions.
- 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.If a central bank buys government securities from the private sector-money markets,leading to an expansion of the money supply, other things being equal, what would theeffect be on the following?(a) The economy’s monetary base(b) Short-term money market interest rates(c) Investment(d) Aggregate Supply(e) Aggregate Demand(f) Economic activity(g) Price level of the economyQuestion 15 What is the likely result from a depreciation of a nation's currency when its economy is already operating at its full-employment level of outpul? CA, Net exports would fall and contribute to demand-pull inflation. OB. Net exports would fall, but equilibrium GDP would rise. OC. Net exports would rise and contribute to demand-pull inflation. CD Net exports would rise, but equilibrium GDP would fall.
- (b) Suppose the real exchange rate is 10, the domestic price level is 8, and the foreign price level is 4. (i) What is the nominal exchange rate? Use the expression: ereal= enor*P / Pfor where ereal is real exchange rate, enor is nominal exchange rate, P is domestic price level and Pfor is foreign price level. (ii) Suppose the real exchange rate rises by 10%, the inflation rate in the domestic country is 6%, and the inflation rate in the foreign country is 4%. By what percentage does the nominal exchange rate change?Hand written plz otherwise downvote If a country switches from a flexible exchange rate regime to a fixed exchange rate regime, this implies that: O a given change in government spending will now have a greater effect on output both fiscal and monetary policy will become more effective in changing GDP O both fiscal and monetary policy will become completely ineffective in changing GDP O monetary policy will become a more effective tool for changing output O a given change in government spending will now have a smaller effect on outputc. 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?