Answer all questions from this section. For each question, identify the statement as True, False, or Uncertain, and explain your reasoning A.1 Following the announcement that the amount of QE intervention by the central bank will be reduced going forward (also known as Quantitative Tightening), according to the UIP condition, an immediate appreciation of home’s nominal exchange rate would be observed. A.2 The difference between the slopes of the IS and RX curves depends only on the sensitivity of net exports to the real exchange rate. A.3 Consider a temporary positive inflation shock in a flexible exchange rate regime (with an inflation targeting central bank) and in a fixed exchange rate regime (where there is no policy intervention). Assume that both economies converge to a medium run equilibrium. Following the shock, inflation converges to its equilibrium value from above in both cases. A.4 The central bank of a common currency area should not respond to a shock specific to one member. A.5 Assume that workers supply effort based on their expected real consumption wage and consume a basket with a non-negligible component of imported goods and services. The government in an open economy implements a contractionary fiscal policy (from an initial medium-run equilibrium) motivated, for example, by its desire to reduce national debt. This leads to lower real wages and higher unemployment in equilibrium. Hint: you may want to compare this with the case in which the initial two assumptions do not hold. A.6 In a 2-bloc world economy with flexible exchange rates, the same inflation shock affects both blocs. Tighter monetary policy in each bloc produces exchange rate appreciation.
Answer all questions from this section. For each question, identify the statement as True,
False, or Uncertain, and explain your reasoning
A.1 Following the announcement that the amount of QE intervention by the central bank
will be reduced going forward (also known as Quantitative Tightening), according to the
UIP condition, an immediate appreciation of home’s nominal exchange rate would be
observed.
A.2 The difference between the slopes of the IS and RX
of net exports to the real exchange rate.
A.3 Consider a temporary positive inflation shock in a flexible exchange rate regime (with an
inflation targeting central bank) and in a fixed exchange rate regime (where there is no
policy intervention). Assume that both economies converge to a medium run equilibrium.
Following the shock, inflation converges to its equilibrium value from above in both cases.
A.4 The central bank of a common currency area should not respond to a shock specific to
one member.
A.5 Assume that workers supply effort based on their expected real consumption wage and
consume a basket with a non-negligible component of imported goods and services. The
government in an open economy implements a contractionary fiscal policy (from an initial
medium-run equilibrium) motivated, for example, by its desire to reduce national debt.
This leads to lower real wages and higher
want to compare this with the case in which the initial two assumptions do not hold.
A.6 In a 2-bloc world economy with flexible exchange rates, the same inflation shock affects
both blocs. Tighter
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