Consider the model of two countries, home and foreign. Suppose that the real money demand in home country is given by: L(i, Y) = Ye-xi, where > 0 and X > 0. Discuss the values of o. (2) Discuss the values of X.
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- Using the Mundell - Fleming short-run model of a small and open economy, with well-labeled diagrams, predict what would happen to i) income, ii) interest rate, iii) consumption, iv) investment, v) exchange rate, and vi) trade balance of the US economy, in response to each of the following shocks under flexible exchange rate system i) banks decide to loan out less funds ii) more foreigners visit USConsider the aggregate demand function, D(EPF/PH, Y-T, I, G) = C(Y-T) + I + G + CA(EPF/PH, Y-T). When Foreign price fell, how would the consumption, the current account and the aggregate demand change: Increase, Decrease or No change? Consumption: Current account: Aggregate demand:Consider a world with two countries, the US and Japan. Assuming the standard Keynesian assumptions, please answer the following questions: a) Assuming flexible exchange rates, suppose the US experiences a positive shock to their consumption function so that the entire consumption function for the US shifts upward. Give and explain two reasons why the consumption function would react in this way. b) Draw three diagrams (all pertaining to the US): on the top left, draw the Keynesian cross diagram, on the bottom left, draw an IS - LM diagram, and on bottom right, draw the FX market. Locate the initial point as point A and then show how each diagram is affected by the shock and label as point B, again, assuming flexible exchange rates. Now assume that the US and Japan are in a fixed exchange rate regime. Show how things change and label the new equilibrium, assuming fixed exchange rates as point C (Note: use the same diagrams - i.e., each diagram should have points A, B, and C). c) Explain…
- Question 10. Applying the Mundell-Fleming model analyse the impact on domestic income, interest rate, CA and KA of the following events: (a) an increase of foreign interest rate; (b) a fall of foreign demand on domestic goods. Provide an analysis for two different countries: country A with fixed exchange rate and perfect capital mobility country B with flexible exchange rate and imperfect capital mobility please do not make a long description but provide graphs and short analysis2) On the graph below show how the Solow model will differ if we allow for trade. Assume that the country has a current account deficit. Hint: Remember that national savings is equal to sY+ = It + CA₁₁ where CA, is the nation's current account at time t. Therefore, the (per worker) capital accumulation function will become k++1 - k₁ = syt - cat - (n+ d) k₁, where ca, is the "current account per worker."KEYNESIAN OPEN-ECONOMY MODEL IN DYNAMICS This section contains questions about a Keynesian open-economy model: • Recall the static IS equation Y = C +I+ G+ X – M. In this section, we assume that the consumption, the investment and the government expenditure are parameters. The trade balance at year t (X – M) is a linear function of the exchange rate Q; and the income Y; such that: X – Mt = aQt – BY; – YYt-1 where a, B and Y are positive parameters. Derive the difference equation that describes the dynamic behavior of the income Y. | What is correct about the dynamic behavior of the model? Select one or more: Select one or more: The model implies that an increase in the income this year will immediately worsen the net export, keeping other things constant. The model implies that an increase in the real exchange rate will be followed by a series of income rises until a new equilibrium is reached. O It makes sense to assume that 2 < 1. 1+3 The model implies that the immediate multiplier…
- Consider the open-economy short run model. Suppose that the sensitivity of investment to interest rates is b'ib¯i =0.38, and the sensitivity of net exports to interest rates is b¯nxb¯nx=0.13. If the foreign interest rate rises by 2.52 percentage points and the domestic interest rate rises by 0.22 percentage points, by how much does short-run output change? Report your answer in percentage points to 2 decimal places.type plzSuppose that you are given the following model for the goods market: C=100 +0.4(Y-T), I=20+.1 Y-200r, G=400, X=200 +0.2Y*-10e, IM=300 +0.3Y+10e and you know that r = 2%, Y*=1,500, e=1 and T =50. Note: e= real exchange rate. The equation for the demand for domestic goods (Z) is and the multiplier for this economy is If the economy were closed, the equation for the demand for domestic goods (Z') would be and the multiplier for the closed economy would be Z = 576 + 0.2Y; multiplier open eco is 2; Z' = 526 + 0.5Y ; multiplier closed eco is 4 O Z = 1000+ 0.4Y; multiplier open eco is 1.67; Z' = 500+ 0.5Y ; multiplier closed eco is 5 Z = 676 + 0.2Y; multiplier open eco is 5; Z' = 496 + 0.5Y; multiplier closed eco is 2 OZ = 576 +0.2Y; multiplier open eco is 5 ; Z' = 500+ 0.4Y; multiplier closed eco is 1.67
- Apply the The Ricardian model of international trade to the following questions Suppose that the investor (whose name is Avril) is risk loving with b = and 5 utility-of-money function v (c) = c². Let p = 2, t = 3,8 = 1, re = ₁ 13 (a) What is Avrilís contingent consumption if x = 0? (b) What is Avrilís contingent consumption if x = 10? (Express the consumption level in each state as a fraction, not a decimal.) (c) Draw Avriliş budget constraint in a CC diagram. Be sure to ex-plain how you constructed your Ögure. (d) Show that Avril has the same expected utility at x = 10 and x = 0. Add an indifference curve to your diagram to illustrate this fact. | (e) Using your diagram, explain why Avril will choose x = 0 if the 5 tax rate increases above t = and will choose x = 10 if it and w = 10. decreases below t = 5 13In the 2-factor, 2 good Heckscher-Ohlin model, a change from autarky (no trade) to trade A. will tend to make rents equal to interest ratesB. will tend to make the wages in both countries less similarC. will tend to make the wages in both countries more similarD. will tend to make the wages equal to returns to capitalCOURSE: MACROECONOMIC - MUNDELL-FLEMING MODEL Until mid-2005, the Central Bank of China established a fixed exchange rate between its currency (yuan) and the dollar. The fixed exchange rate regime was reintroduced during the Great Recession between July 2008 and June 2010.After that date, the Chinese central bank established fluctuation bands for the yuan allowing it to move within these bands. However, the US has accused China on several occasions of taking actions to devalue its currency against the dollar.EXPLAIN and GRAPH with an open economy model with a fixed exchange rate (MUNDELL-FLEMING MODEL) the different chain effects that are generated when a country devalues its currency. From your results DETERMINE why it would be convenient for China to devalue its currency with respect to the dollar and in what way USA is harmed. Hint: according with statement on first paragrah, explain what's happens if devaluation process is defined and by Mundell-Fleming Model explain differents…