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Again, suppose you wanted to make domestic industries more competitive but did not want to alter aggregate income. Assuming now a fixed exchange rate, what policy or combination of policies should you pursue, according to the Mundell–Fleming model? Select all that apply
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- Suppose more companies begin to “nudge” their employees into saving for retirement throughthe use of automatic enrollment plans. Use the long-run model of a small open economy to graphically illustrate the impact of the rise in retirement savings on the exchange rate and the trade balance. Explain the results of your graphical analysis in detail. Assume that the country starts from a position of the trade balance. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction that the curves shift; and v. the new long-runequilibrium valuesQ4) Suppose that Covid -19 increases the saving rate of all countries, not only the U.S., so R* decreases. Use the DD-AA model with flexible exchange rates to study the effect of higher savings . Q4B) Discuss how changes in Foreign Demand affect U.S. aggregate demand and output through the Current Account. Draw diagrams and justify all your answers.Suppose for Home: Ms=2169, Md/P=5767-99865*R, P=2 Suppose for Foreign:Ms=2655, Md/P=7099-98140*R, P=1 Suppose Absolute PPP holds. What is the expected exchange rate Ee?
- U S foreign exchange intervention is sometimes done by an Excha U.S. foreign exchange intervention is sometimes done by an Exchange Stabilization Fund, or ESF (a branch of the Treasury Department), which manages a portfolio of U.S. government and foreign currency bonds. An ESF intervention to support the yen, for example, would take the form of a portfolio shift out of dollar and into yen assets. Show that ESF interventions are automatically sterilized and thus do not alter money supplies. How do ESF operations affect the foreign exchange risk premium? U S foreign exchange intervention is sometimes done by an ExchaThe Big Mac index was introduced by The Economist magazine in 1986, as a playful example to introduce the concept of purchase power parity (PPP) and under/overvaluation of currencies. The PPP rates are usually compiled based on consumer baskets of comparable quality. The problem is that goods in different economies are hardly comparable. The customer basket contains only one good which is made everywhere in exactly the same way – McDonald’s Big Mac. You might think that is an oversimplification, but in fact the Big Mac Index has been widely used for comparing currencies ever since it was first published. Explore the concept behind the Big Mac index and critically assess the importance of comparability of goods in various economies.The DD-AA model to the right shows an economy's short-run equilibrium at point 1. Note: 'E' = Es/E: Suppose the government imposes a temporary tariff on all imports. Exchange Rate, E Using the line drawing tool, show the impact of this commercial policy. Properly label this line. Carefully follow the instructions above and only draw the required object. DD1 DD2 According to your graph, the domestic economy will experience E 1 A. a rise in output and a currency depreciation. B. a rise in output and a currency appreciation. Now suppose that with the passage of time it becomes increasingly clear that the tariff will be permanent. This will induce participants in the foreign exchange market to revise their expectations. More specifically, the expected future exchange rate, E°, will decrease. AA1 In the DD-AA model, this revised expectation of the future exchange rate will cause y1 Output, Y O A. a rightward shift in the DD schedule, and thus a reinforcement of the effects produced by the…
- Consider the goods market for a small open economy, where e is the real exchange rate, X are exports, IM are imports and Y* is foreign income., C- 268 + 0.55YD X= 0.18Y - 107e 1=0.15Y - 786 I G= 930 T= 1000 IM = 0.7Y + 113e Y=3749 i= 0.01 (1%) e= 1 Claculate the level of equilibrium output and the trade balance in this economy: OA. Y=1117.96; NX = -307.35 OB. Y= 1094.96; NX= -311.65 OC. Y= 1076.09; NX= -303.78 OD. Y= 1136.26, NX = -317.95When is exchange-rate targeting likely to be a sensiblestrategy for industrialized countries? When is exchangerate targeting likely to be a sensible strategy for emerging market countries?You are given the following information. The current dollar/euro exchange rate is 1.25 dollars per euro. A U.S. basket that costs $100 would cost 64 euro in the euro area. For the next year, the Fed is predicted to keep U.S. inflation at 3% and the ECB is predicted to keep euro area inflation at 1%. The speed of convergence to absolute PPP is 15% per year. e. What is the expected U.S. minus euro area inflation differential for the coming year? f. What is the expected rate of nominal depreciation for the United States (versus the euro)?
- 1) Large current account deficits imply large financial account surpluses. True Or False?Explain. 2) The longer the "pass-through" period following a devaluation, the faster the desirable balance of trade effects of a devaluation will appear on quantities traded. True or False? Explain. 3) Suppose we observe the following 1-year interest rates: į Turkey = 10% į USA = 2% The exchange rate is quoted as theTL price of dollars and is currently E = 6.0 TL Given the information above, what is the 12-month forward rate? 4) How is the balance of payments linked to national saving and investment? Explain.Consider the foreign exchange market. For each of the scenarios below, answer thefollowing questions: (1) Which curve moves? (2) In which direction does it move? (3)What happens to the nominal exchange rate in equilibrium (i.e., does the US Dollarappreciate or depreciate)?(a) Brazil places tariffs on US products, limiting imports from America.(b) The US becomes a much riskier place to invest because of widespread politicalunrest.(c) Firms in the UK become much more profitable than those in the US.(d) The global economy surges, sparking higher consumption everywhere in the world.(e) Japan’s central bank cuts interest rates in that country.(f) Mexico’s firms do a much better job of marketing their products to the UnitedStates.In the monetary small open-economy model, suppose that money supply equals 100. The money demand function takes the form Md=P(0.5Y-400r). The foreign price level P* is 1. The equilibrium output Y is 200 and the world interest rate r* is 0.2. (a) Determine the equilibrium exchange rate. (b) If the country adopts a flexible exchange rate regime, what will be percentage change in the equilibrium exchange rate if money supply goes up by 10%? (c) If foreign price rises by 50%, what will be the percentage change in the equilibrium exchange rate? In this case, we assume that money supply is fixed at 100. (d) If the country wishes to stabilize the exchange rate, what will be the new money supply if foreign price rises by 50%?