2. Suppose that there is a wave of pessimism in the economy due to Covid-19 and, as a result,the economy is operating below its natural level of output with high unemployment and lowinflation. So, the central bank decided to stimulate the economy. Assume a small openeconomy with perfect capital mobility and a flexible exchange rate system.a) (i) Should the central bank increase or decrease the money supply if it wants to stimulatethe economy? Explain.(ii) List two monetary policy tools that the central bank uses to influence the moneysupply and explain how each tool should be applied to be consistent with your responsein (i).b) Which macroeconomic variables change immediately and in what direction?c) Which macroeconomic variables change over the short run and in what direction?d) What happens to employment and inflation? Does the rate of economic growth increase?

a) (i) Should the central bank increase or decrease the money supply if it wants to stimulate the…

Answered: 2. Suppose that there is a wave of…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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2. Suppose the central bank of a country is worried about the economy overheating so it enacts a contractionary monetary policy (reducing the money supply): 2A. Assuming the country has a fixed exchange, illustrate the effects of the contractionary monetary policy with both an IS-LM-BOP graph and a foreign exchange market graph for the foreign currency, explaining which curve(s) shift and why. Explain the effects on GDP, interest rates, and the current account and capital account. 2B. What would the central bank have to do to maintain the fixed exchange rate? Illustrate this on the foreign exchange graph in 2A. (You do not need a new graph). 2C. Define sterilization and explain what the central bank would have to do to sterilize the intervention. Show on your graphs the GDP, interest rate, and exchange rate with sterilized intervention (label as point 1 on the graphs from 2A). 2D. Suppose instead the central bank does not sterilize the intervention. Explain what would happen and…
2. Under what circumstances might an increase in worldwide interest rates be beneficial for a small open economy (SOE)? Explain.
62. Consider the monetary transmission mechanism in an open economy. Other things being equal, an increase in the domestic money supply leads to a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. an appreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand. an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
Q3-11 If a country ties its currency to a specific foreign currency and allows its holdings of that currency to govern the country's money supply, this arrangement is known as a Select one: a. currency board. b. floating exchange rate. c. monetary union. d. Special Drawing Right.
13. Study Questions #13. Ch 11. Suppose the interest rate (on an annual basis) on three-month Treasury bills is 10% in London and 6% in New York, and the spot rate of the pound is $2.03. How can a U.S. investor profit from uncovered interest arbitrage? O Purchase pounds at $2.03 in New York to buy U.K. Treasury bills in London, thus earning 4% per year. O Purchase pounds at $2.03 in New York to buy U.K. Treasury bills in London, thus earning 3% per year. O Purchase pounds at $2.03 in New York and sell them in the U.K., thus earning 4%. O Purchase pounds at $2.03 in New York to buy U.K. Treasury bills in London, thus earning 3.05% per year.
2 Using figures for both the short run and the long run without PPP, describe the effects of a permanent decrease in the level of Korean money supply on the won/dollar exchange rate (E₩/$), the Korean interest rate (RK), and the Korean price level (PK). Assume that the Korean real national income is constant.
QUESTION 4 Using information from problem 3, suppose that the financial crisis worsens and now the supply curve for USD is 91+e. bln dollars per week and the demand curve is 155 - e bln dollars per week. The central bank still commits to its pledge to support the exchange rate if Peso depreciates by over 20% from the original level (more specifically, in this case the fixed exchange rate will be 20% higher than the original level). To maintain the fixed exchange rate, the central bank will have to spend billion dollars of foreign exchange reserves per week. Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard may automatically delete it and you should not do anything about it. In case of percentages, do not type in the percentage…
3. Target zone regimes Suppose the fictional country of Jablor has implemented a target zone exchange rate regime. The Jablorian central bank has set an upper and lower bound for the value of its currency, the Jablorian dollar, and has intervened when the value of its currency has approached either bound. The following diagram tracks the value of the Jablorian dollar over time. VALUE OF THE CURRENCY TIME Upper Bound - ? Market-determined Exchange Rate Lower Bound
8. Why exchange rates matter Suppose that you go on vacation to Canada every summer. Last year, the hotel room where you stayed cost C$100 per night, and it costs the same this year. The exchange rate was 1.04 US$/C$ last year, and it is 0.95 US$/C$ this year. This means you will pay per night this year than you paid last year. The U.S. dollar-Canadian dollar exchange rate is essentially the price of a Canadian dollar in terms of U.S. dollars. When this price falls, the Canadian dollar is said to depreciate against the U.S. dollar. Thus, from your analysis, you can conclude that when the Canadian dollar depreciates against the U.S. dollar, Canadian goods and services become expensive for Americans. DeutschAuto is a German automaker that pays most of its production costs in euros. Suppose that in 2007, DeutschAuto's cost of producing a car was €23,000 and that the company sold a car in the United States for $36,000. Further, suppose that the dollar-euro exchange rate rose from 1.35$/ €…
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.

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