2. Consider an economy that suffers a fall in business confidence (which tends toreduce investment). Let UIP stand for the uncovered interest parity condition.a. Suppose the economy has a flexible exchange rate. In an IS – LM –UIP diagram,show the short-run effect of the fall in business confidence on output, the interest rate,and the exchange rate. How does the change in the exchange rate, by itself, tend toaffect output? Does the change in the exchange rate dampen (make smaller) oramplify (make larger) the effect of the fall in business confidence on output?b. Suppose instead the economy has a fixed exchange rate. In anIS – LM –UIP diagram, show how the economy responds to the fall in businessconfidence. What must happen to the money supply in order to maintain the fixedexchange rate? How does the effect on output in this economy, with fixed exchangerates, compared to the effect you found for the economy for part (a), with flexibleexchange rates?

Answered: 2. Consider an economy that suffers a…

2. Consider an economy that suffers a fall in business confidence (which tends to reduce investment). Let UIP stand for the uncovered interest parity condition.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: if interest rate parity holds, then the one-year foward rate of a currency will ______ the predicted…

A: If interest rate parity holds, then the one-year forward rate of a currency will ______ the…

Q: a appreciate, rise more rapidly b depreciate, rise more rapidly c remain unchanged, rise more…

A: Answer -

Q: In the market for foreign-currency exchange in the open-economy macroeconomic model, which of the…

A: The value of two currencies in terms of their purchasing power. While two currencies may have the…

Q: Suppose for Home: Ms=1284, Md/P=8521-83465*R, P=3 Suppose for Foreign: Ms=2257, Md/P=5910-28382*R,…

A: Given; For home:- MS=1284MdP=8521-83465RP=3 For foreign:- MS=2257MdP=5910-28382RP=3

Q: 1. Assuming that the economy is in equilibrium, find the value of the interest rate. 2. Going from…

A: A small open economy contracted to SOE, is an economy that takes part in global exchange, however,…

Q: Consider a small open economy with desired national saving of S^d=1000+1000r^w and desired…

A: DISCLAIMER “Since you have asked multiple question, we will solve the first three question for you.…

Q: From time to time, individual countries face adverse economic conditions. In some cases, that may…

A: Currency depreciation refers to the fall in the worth of a domestic currency in comparison to the…

Q: Cd =360-200r+0.1y I= 120-400r G=120…

A: The rate at which the currency of nation can be exchanged with the another refers to the "exchange…

Q: If the foreign price level increases by 3%, and the domestic price level increases by 20%, by…

A: In a foreign market, the price of exchange of one currency for another is referred to as the…

Q: Distinguish between nominal and real exchange rate in an open economy. Explain with the aid of a…

A: The rate at which one currency will be exchanged for another is known as the exchange rate. It is…

Q: In a small open economy model, when every foreign country reduces government spending in their…

A: *Hi there ,as you have posted multiple questions following our guidelines we will only solve the…

Q: Assume the real exchange rate q between the UK pound and Swiss franc is 1.19. What does that mean…

A: The real exchange rate is used to compare the currency of a country and currency of another country.…

Q: Consider the goods market for a small open economy, where e is the real exchange rate, X are…

A: The measure that depicts the final value of goods and services being produced in an economy during…

Q: If national income Y = 10,500, disposable income Yd = 8,500 , consumption is C = 8,000, transfer…

A: The information given to us is as :- National income Y = 10,500 Disposable income is Yd = 8,500…

Q: Assume that an open economy with a floating exchange rate is described by the equations: C =…

A: The measure that depicts the value of one currency being measured in terms of another currency in…

Q: Q)How do higher interest rates affect the exchange rate? Answer including graphs

A: The exchange rate is the price of one currency in terms of the other currency. Whenever one has to…

Q: The interest rate in Japan is 2% and the interest rate in the US is 5%. The spot exchange rate is…

A: The interest rate in Japan is 2% The interest rate in the US is 5% The spot exchange rate is 100 yen…

Q: An economy is described by the following two equations. Y = C (Y – T) + I (r* ) + G – NX(e) M/P…

A: The economies around the world tend to work upon the basis of the actions taken by various entities…

Q: With the help of an IS-LM diagram explain and show why a cut in government spending has a larger…

A: Under a fixed exchange rate system and perfect capital mobility ,the cut in the governtment spending…

Q: Under a floating exchange rate regime, the domestic currency will normally depreciate if the money…

A: A floating exchange rate is a system where the value of a currency is determined on the basis of its…

Q: Suppose that EUR/USD is 1.6. Assume that CPI in Europe is expected to increase by 30% and CPI in the…

A: The rate at which one currency is exchanged with other is called the exchange rate. One of the…

Q: A small open economy has perfect financial capital mobility, no risk premium, a flexible exchange…

A: Since the question you have posted consists on multiple questions, we will answer the first two…

Q: Q4) Suppose that Covid -19 increases the saving rate of all countries, not only the U.S., so R*…

A: The process of changing a given currency into a different one at a specified rate is known as…

Q: D Question 1 Consider the following open economy. The real exchange rate is foxed and equal to one.…

A: * SOLUTION :- (2)

Q: oyment. In the 2008 global financial crisis, many investors considered the U.S. economy a safe place…

A: Capital flow is the movement of money for investment, trade, or business production. Capital inflow…

Q: hips be

A: Interest rate parity is a condition having possibilities of no arbitrage which in turn represents…

Q: Suppose the price a Burger in India is Rs. 210 and in USA it is $3. The Exchange rate between two…

A: The price relatives which tend to depict the price ratio of the same good or service in the national…

Q: Assume the real GDP of Brazil in 2020 was R 6 billion (Real). If the exchange rate was 1 Real =…

A: Given information 1 real=$0.25 Real GDP of Brazil=R 6 Billion The exchange rate represents the value…

Q: which of the following is an assumption of the monetary approach to the exchange rates? A - PPP…

A: The market for foreign exchange is an internationally, decentralized marketplace that allows both…

Q: If PPP and real interest parity both hold in two countries, then the countries' real interest rates…

A: Answer is given below

Q: In an open economy,a change in domestic net foreign asset depends on how much is saved, and on…

A: In an open economy, the domestic net foreign asset (DNFA) is decided by the difference among a…

Q: 3. How does increased foreign demand for US government bonds affect the foreign exchange

A: Foreign exchange rate is the rate at which one currency is exchanged for the other however there may…

Q: Why has it been politically challenging for governments to refocus efforts on new technology,…

A: A recession is defined as a period of the business cycle when there is a decline in economic…

Q: Assume that Canada and the United States frequently trade with each other. Under the freely floating…

A: What is a free floating exchange rate: The amount of domestic currency required as the purchasing…

Q: 4. Robust growth in many emerging economies like Hong Kong has led to a significant decrease in the…

A: Exchange rate is the rate at which the currency of one country is exchanged for the other currency.…

Q: If national income Y = 10,000, disposable income Yd = 8,000 , consumption is C = 7,500, transfer %3D…

A: Disposable income is total personal income minus current income taxes. In national accounts…

Q: Consider Nowehereland, a small open economy. Suppose business people in Nowhereland are pessimistic…

A: The question is asking about the impact of a decrease in demand for funds by businesses in a small…

Q: In an open economy that is on a flexible exchange rate, show the short run effects on output and…

A: Flexible exchange rate is the monetary system that determines the supply and demand of money through…

Q: Assume that the following equations characterize a small open economy: Y= 5,000 C-0.5 (Y - 7)…

Q: uppose for Home: Ms=2169, Md/P=5767-99865*R, P=2 Suppose for Foreign:Ms=2655, Md/P=7099-98140*R,…

A: Home Ms=2169 Md/P=5767-99865*R P=2 Foreign Ms = 2655, Md/P=7099-98140*R P=1

Question

2. Consider an economy that suffers a fall in business confidence (which tends to
reduce investment). Let UIP stand for the uncovered interest parity condition.
a. Suppose the economy has a flexible exchange rate. In an IS – LM –UIP diagram,
show the short-run effect of the fall in business confidence on output, the interest rate,
and the exchange rate. How does the change in the exchange rate, by itself, tend to
affect output? Does the change in the exchange rate dampen (make smaller) or
amplify (make larger) the effect of the fall in business confidence on output?
b. Suppose instead the economy has a fixed exchange rate. In an
IS – LM –UIP diagram, show how the economy responds to the fall in business
confidence. What must happen to the money supply in order to maintain the fixed
exchange rate? How does the effect on output in this economy, with fixed exchange
rates, compared to the effect you found for the economy for part (a), with flexible
exchange rates?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Discuss the relationships between Purchasing Power Parity, Uncovered Interest Rate Parity and Fisher equation.
Evaluate the usefulness of relative power purchasing parity (PPP) in predicting movements in foreign exchange rates on: a. Short-term basis (for example, three months). b. Long-term basis (for example, six years).
Assume that an open economy with a floating exchange rate is described by the equations:C = 0.5(Y-T)T= 1000I= 1500 -250rG= 1500NX= 1000 – 250e(M/P)d = 0.5Y – 500rM= 1000S-I= 500 – 250rP= 2r* = 1a. Derive the equation for the IS* curve. b. Derive the equation for the LM curve. c. Solve for equilibrium Y
Assume that an open economy with a floating exchange rate is described by the equations: C = 0.85(Y-T)T= 1000I= 1500 -200r G= 3000NX= 2000 – 250e (M/P)d = 0.4Y – 500r M= 4000S-I= 750 – 250rP= 2r* = 4 Derive the equation for the IS* curve. Derive the equation for the LM curve. Solve for Y. Solve for NX and e. Using the information from parts a. to d. above, graphically illustrate on a clearly labelled diagram, the short-run impact of contractionary fiscal policy on the exchange rate and level of output in this small open economy. Assuming that the economy adopted a fixed exchange rate system, illustrate on a clearly labelled diagram, the impact of contractionary fiscal policy. In one sentence, explain the type of intervention needed to maintain the fixed exchange rate proposed in part f. above.
Why and how net exports and net capital flow are related to each other? If Saudi Arabia experience trade deficit does it necessarily create trouble for a county’s economic growth? Using Purchasing-Power Parity Theory, how nominal exchange rates of a country are determined in relation to other countries?
Q)Suppose that the relative PPP holds. If a nation experiences 10% inflation and its trading partner does not, what happens to its nominal exchange rate? Not enough information is provided. It does not change. It appreciates by 10%. It depreciates by 10%.
What is the connection between the Higher net income of central bank ang foreign exchange gains?
If a country has a persistently negative current account, this implies that it is “borrowing” internationally. Explain why and what this means with respect to net capital flows into the country and with respect to the relationship between Saving and Investment in the country.
Consider that the home country increased government expenditures. Analyze its effects on net exports and real exchange rate using graphs. Describe briefly.
Consider that foreign country decreased government expenditures. a) Analyze its effects on net exports and real exchange rate. b) Consider that prices in-home and foreign country did not change. Analyze the effect of a decrease in government expenditures in the foreign country on the nominal exchange rate.
Suppose in the goods market equilibrium of an open economy, saving is $6 billion, and investment is $8 billion. Assume there is no measurement error. Then capital and financial account balance is equal to X -$2 billion $0 billion $4 billion $2 billion
Consider the following information about a small open economy:Y=1000;C=100+.75(Y-T);I=100-5r;G=100;T=100;NX=250-16E;r*=4.Find the equilibrium real exchange rate.