2) For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. Note: In this question (unlike in the Work It Out question), assume that the government allows the exchange rate to float but also responds by using monetary policy to stabilize output. Hint: In each case, make use of the goods market equilibrium condition to understand what happens to consumption, investment, and the trade balance in the shift from the old to the new equilibrium. a. Foreign output increases. b. Investors expect an appreciation of the home currency in the future. c. The home money supply decreases. d. Government spending at home decreases. 3) Repeat the previous question, assuming the central bank responds in order to maintain a fixed exchange rate. In which case or cases will the government response be the same as in the previous question? a) Foreign output increases. b) Investors expect a home appreciation. c) Money supply decreases. d) Government spending decreases.
2) For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. Note: In this question (unlike in the Work It Out question), assume that the government allows the exchange rate to float but also responds by using monetary policy to stabilize output. Hint: In each case, make use of the goods market equilibrium condition to understand what happens to consumption, investment, and the trade balance in the shift from the old to the new equilibrium. a. Foreign output increases. b. Investors expect an appreciation of the home currency in the future. c. The home money supply decreases. d. Government spending at home decreases. 3) Repeat the previous question, assuming the central bank responds in order to maintain a fixed exchange rate. In which case or cases will the government response be the same as in the previous question? a) Foreign output increases. b) Investors expect a home appreciation. c) Money supply decreases. d) Government spending decreases.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Please just help me with 3. Thank you
Transcribed Image Text:2) For each of the following situations, use the IS-LM-FX model to illustrate the effects of
the shock and the policy response. For each case, state the effect of the shock on the
following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB.
Note: In this question (unlike in the Work It Out question), assume that the government
allows the exchange rate to float but also responds by using monetary policy to stabilize
output.
Hint: In each case, make use of the goods market equilibrium condition to understand what
happens to consumption, investment, and the trade balance in the shift from the old to the
new equilibrium.
a. Foreign output increases.
b. Investors expect an appreciation of the home currency in the future.
c. The home money supply decreases.
d. Government spending at home decreases.
3) Repeat the previous question, assuming the central bank responds in order to maintain a
fixed exchange rate. In which case or cases will the government response be the same as
in the previous question?
a) Foreign output increases.
b) Investors expect a home appreciation.
c) Money supply decreases.
d) Government spending decreases.
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