8. In a small open economy, net exports NX depend negatively on domestic in- come Y and negatively on the real exchange rate & eP/P, where e is the nom- inal exchange rate (the foreign-currency price of domestic currency), and Pand P* are the domestic- and foreign-currency prices of domestically and foreign- produced goods, respectively. Assume initially that both P and P* are fixed. There is perfect mobility of capital, so balance-of-payments equilibrium requires that ii, where i and i are the domestic and foreign interest rates. Assume the economy adopts a flexible exchange rate regime. (a) Using the IS-LM-BP model, carefully explain whether monetary policy and/or fiscal policy can succeed in raising the economy's GDP. Now assume instead that the economy adopts a fixed exchange rate regime. (b) For each of the policies below, explain what foreign-exchange market intervention is required to support the fixed exchange rate, and whether the policy would succeed in raising GDP:

8. In a small open economy, net exports NX depend negatively on domestic in- come Y and negatively on the real exchange rate & eP/P, where e is the nom- inal exchange rate (the foreign-currency price of domestic currency), and Pand P* are the domestic- and foreign-currency prices of domestically and foreign- produced goods, respectively. Assume initially that both P and P* are fixed. There is perfect mobility of capital, so balance-of-payments equilibrium requires that ii, where i and i are the domestic and foreign interest rates. Assume the economy adopts a flexible exchange rate regime. (a) Using the IS-LM-BP model, carefully explain whether monetary policy and/or fiscal policy can succeed in raising the economy's GDP. Now assume instead that the economy adopts a fixed exchange rate regime. (b) For each of the policies below, explain what foreign-exchange market intervention is required to support the fixed exchange rate, and whether the policy would succeed in raising GDP:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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11 Use the IS-LM-UIP model for an open economy with flexible exchange rates as a useful tool in discussion of domestic macroeconomic effects of high electricity prices, including petrol and diesel prices, and how this affects the purchasing power and economy of a country when electricity prices are 7-10 times normal
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Consider an economy that lasts for two periods, period 1 and period 2. Let TB1 denotes the trade bal- ance in period t, CA the current account balance in period 1, and Bf the country's net international investment position at the end of period 1. Let r denote the interest rate paid on assets held for one period. Assume net international payments to employees, net unilateral transfers, and valuation changes are always equal to zero, so that in period t = 1,2: CA = r B_1 = TB and CA = B - B²_1 %3D A) Which conditions are needed to show that B; = 0? %3D B) Suppose that the country runs perpetual trade deficits. What can you tell about the country's initial net foreign asset position? Justify your answer. C) If the country starts period 1 with no debt or assets, what can you say about the current account in periods 1 and 2?
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QUESTION 2Consider a country with a flexible exchange rate. If the central bank of this country raises its interest rate by 0.5%-points, whereas observers had anticipated an increase of only 0.25%-points, one can expect that: Bond prices and stock prices rise, the country’s currency depreciatesBond prices rise, stock prices fall, the country’s currency appreciatesBond prices fall, stock prices rise, the country’s currency depreciatesBond prices and stock prices fall, the country’s currency appreciates
3. If the exchange rate changes from 1.50 Canadian dollars per U.S. dollar to 1.67 Canadian dollars per U.S. dollar, we say that the Canadian dollar has appreciated against the U.S. dollar. True False
1.Determine the initial effect from the following transactions on the Malaysia net exports (exports and imports) or net capital outflow (purchase of foreign assets by locals and purchase of domestic assets by foreigners). a. A Japanese spending his time and money having a vacation in Singapore. b. Megan, an American buying a pair of shoes from Bata shoes made in Malaysia.
Practice Exchange Rate 1- $/yen = .009, yen/pound= 120, $/pound= 1.15 a. Is there alignment of exchange rates? b. Will arbitrage take place? c. At what direction the arbitrage will take place? d. For an investor investing $1000000, what will be the gain? 2- January 2022 spot yen/$ rate was 110. January 2023 spot yen/$ rate was 105. a. Which currency did appreciate b. Which currency did depreciate ? By how much ? By how much ? ? 3- Nominal $/pound = 1.20. CPIusa = 115, CPIuk = 120. What is the real exchange rate (base year 2012)? 4- The change in nominal exchange rate ($/pound) from 2012 to 2022 was 7%. Since 2012, inflation in US has increased by 15%, inflation in UK has increased by 19%. What is the real change in exchange rate?
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