Consider the following small open economy: Cd = 200 + 0.69Y 1d = 80 – 1000r G = 20 NX = 85 -0.09Y - e a) Suppose that the economy has a fixed exchange rate: ē = 80 Derive the open economy IS curve with r on the left hand side and Y on the right hand side for the fixed exchange rate economy. b) Solve for the level of output in a long run equilibrium if r=0.05. c) Now suppose that the world interest rate is given by r=0.1 and the economy has a floating exchange rate. What must the nominal exchange rate, e, be in a long run general equilibrium? Assume the level of output in part d) Use this model to discuss the short run and long run effects of an increase in government purchases on output and the real interest rate in both the fixed and flexihle exchange rate cases.

Consider the following small open economy: Cd = 200 + 0.69Y 1d = 80 – 1000r G = 20 NX = 85 -0.09Y - e a) Suppose that the economy has a fixed exchange rate: ē = 80 Derive the open economy IS curve with r on the left hand side and Y on the right hand side for the fixed exchange rate economy. b) Solve for the level of output in a long run equilibrium if r=0.05. c) Now suppose that the world interest rate is given by r=0.1 and the economy has a floating exchange rate. What must the nominal exchange rate, e, be in a long run general equilibrium? Assume the level of output in part d) Use this model to discuss the short run and long run effects of an increase in government purchases on output and the real interest rate in both the fixed and flexihle exchange rate cases.

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

37. Assume the Marshall-Lerner condition holds. Which of the following will cause an increase in net exports? A) an increase in government spending B) an increase in investment C) a reduction in foreign output D) a reduction in the real exchange rate E) all of the above 38. In an open economy, an increase in government spending will cause A) a reduction in domestic output. B) a reduction in imports. C) a reduction in net exports. D) all of the above E) none of the above 39. Suppose that the rest of the world experiences an economic boom causing an increase in foreign output (Y*). This increase in Y* will not cause which of the following to occur? A) the domestic country's output to increase B) the domestic country's consumption to increase C) the domestic country's output to increase and its trade balance to worsen as imports increase D) all of the above E) none of the above 40. We will generally observe that the more open an economy A) the larger the effect of fiscal policy on output…
Which of the following statements is true? A)The open-economy IS curve is derived in the same way that the closed-economy IS curve is derived. B)The closed-economy IS curve is downward sloping, but the open-economy IS curve is upward sloping. C)Some factors that shift the IS curve in the closed economy in one direction will shift the IS curve in the open economy in the opposite direction. D)Factors that raise a country's current net exports, given domestic output and the domestic real interest rate, shift the open-economy IS curve up.
In the short run of a model with sticky prices, a reduction in the money supply raises the nominal interest rate and appreciates the currency. In this case the country's expected real interest rate will In addition, the real exchange rate, after initially will subsequently The latter movement of the real exchange rate satisfies the real interest parity condition which indicates that a country's currency will be expected to undergo a real depreciation when its real interest rate ▼real interest rates elsewhere.
Consider a country with no capital mobility and flexible exchange rates. a. Solve for the exchange rate that clears the trade balance as a function of the level of income, Y. (Assume that the trade balance is in the form T =T, + øq– mY where øis a positive constant and q = (eP*/P)). b. Solve for the level of income as a function of all exogenous variables. In what way does the multiplier differ from all other open economy multipliers computed before?
C= C0 + cYD YD = Y I = I0 - br NX = N0 - n1Y + n2Yf + n3R M/P = M0 + m0Y - m1.r where AD = C + I + G0 + NX. What is the impact of M0 and G0 on the equilibrium value of R. That is, discuss the role ofmonetary policy and fiscal policy on the real exchange rate.
Assume that the expected future exchange rate is unchanged and that the central bank holds the real money supply fixed. Draw an IS-LM-IP diagram to show the effect of the drop in consumer confidence. Label all axes and curves and mark all the values and equilibrium points appropriately.
How do changes in the interest rates set by a central bank influence the exchange rates between currencies in the short term and long term? Discuss the potential mechanisms through which these changes can affect international trade balances and capital flows, and consider any possible lag effects in these responses.
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.
17. Consider two exchange rates X/Y and Z/Y. (For example EUR/USD and JPY/USD.) They both follow perfectly correlated geometric Brownian motions with parameters (1,01) and (μ2,02). (a) The cross-exchange rate X/Z (for example EUR/JPY) follows a standard Brownian motion (b) The cross-exchange rate X/Z (for example EUR/JPY) follows a general Brownian motion (c) The cross-exchange rate X/Z (for example EUR/JPY) follows a geometric Brownian motion (d) The cross-exchange rate X/Z (for example EUR/JPY) does not follow a geometric Brownian motion
How will the following event affect variables 1 through 3 in the foreign exchange market under a flexible exchange rate system; other things unchanged. Event: The U.S. Central Bank (the Fed) starts buying Chinese currency using dollar reserves: Variable 1: Supply of dollar in the foreign exchange market ___(increase, decrease, unaffected: briefly explain why). Variable 2: Value of dollar in the foreign exchange market unaffected: briefly explain why). Variable 3: American goods exported to China unaffected: briefly explain why). (appreciate, depreciate, (increae, decrease,
Please fast response