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

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%.
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
Discuss the relationships between Purchasing Power Parity (PPP), Uncovered Interest Rate Parity (UIRP) and Fisher equation. Derive UIRP using PPP and Fisher equation.