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Identify the ways in
which international
exchange rate arrangements can affect
domestic monetary
policy operations.
Step by step
Solved in 3 steps
- Problem 3. Spillovers and International Transmission of Shocks Panama (Home) is a small open economy that pegs its exchange rate to the US (Foreign) dollar. Assume that shocks/policies of Panama have no impact on the US economy as it is a small country. We assıme that investment in Panama only depends on the real interest rate so that when rates rise investment falls and vice versa. Formally, we can write I = I(R), I'(R) < 0. We will say that a shock is transmitted positively from the US to Panama, whenever outputs of the US and Panama move in the same direction in response to that particular shock. A shock is transmitted negatively if the outputs of the US and Panama move in opposite direction. Furthermore, assume that all shocks analyzed below are temporary. (a) Using the AA-DD framework, show the effect a US monetary expansion (R* 4) on output, inter- est rates, money supply, and the exchange rate in Panama. Do US monetary shocks transmit positively or negatively to Panama? (b) Do…Which of these graphs shows how a contractionary monetary policy at Home affects its exchange rate? EHIF) COUP) A B ERAM LY ERA LY) ERRIF) MP с ERR ERRIF) MP ERR E(H/F) C(H/F) ERRH) L B #. 40XX) ERAH) ERRIF) D ERR ERRF) Ma ERRYour friend visited the country of Sibelia. He reports to you that one can always legally exchange 1 euro for exactly 2.50 Sibelian dollars. What type of exchange rate system does Sibelia most probably have? O A Hard peg. O B. Managed float. O C. Free float. O D. Soft peg.
- Under a credible system offixed nominal exchangerates...A.The Central Bank can adjustthe interest rate as it deemsappropriate for smoothingdomestic outputfluctuationsB.Domestic inflation will beapproximately equal to theinflation rate of the countryto which the domesticcurrency is peggedC.Public debt can bemonetised, i.e. viagovernment bonds boughtby the Central Bank againstnewly created moneyD.All of these optionsE.None of these optionsDollar/euro exchange rate, Ee Retum on dollar deposits Expected retum on euro deposits Rates of return (in dollar terms) 3D L(R Yus) M Pus U.S. real money supply (increasing) U.S. real money holdings Given the graph above, an increase in the European money supply causes Lütfen birini seçin: O A. the euro to depreciate O B. the euro to appreciate OC value of the euro to stay constant ODa fall in the dollar interest rate O E. a rise in the euro interest rateIn August 2015 investor sentiment shifted against the Chinese yuan. Investors sold the yuan and bought dollars, as financial capital flowed out of China, seeking better rates of return in other countries. What actions did China take in response to this situation? O China used $1 trillion of its foreign exchange reserves to purchase the yuan in an attempt to prevent further devaluation and tightened capital controls on financial outflows. O China loosened capital controls to encourage forcign investment into the Chinese economy. O China sold the yuan to encourage further depreciation in an attempt to improve its trade deficit. China's monetary authority sold tie yuan in an attempt to orevent fürther devaluation and raised interest rates to stem the outflow of forcige capital.
- (1) In the IS-LM model, how does an increase in money supply affect theIS curve?(2) According to the Impossible Trinity, if an economy wants to allow for free capitalflows as well as to have full control over its currency, which exchange rate systemshould be adopted?(3) In an IS-LM model, if the investors are suddenly less willing to invest, then what effects does this change make to the equilibrium? Explain your intuitions.(4) According to your answers in (3), if the government wants to stabilize the interestrate using monetary policies, how should it behave? If the government, instead, wantsto stabilize the output level using monetary policies, what is your policy suggestion forit?is it true or false or uncertain, explain ?Suppose a country's central bank announces that it is decreasing the long-run money growth rate to tame inflation. The country's currency will suddenly and its rate of depreciation will then O appreciate; rise O appreciate; fall O depreciate; rise O depreciate; fall
- 1. Suppose in the New Keynesian open-economy model that there is a negative output gap andthe central bank decreases the current money supply.(a) Assuming that the exchange rate is flexible. Draw diagrams for the labour, goods andmoney markets, and the production function. Determine the equilibrium effects of thisdecrease in the money supply on employment, output, consumption, investment, money,real wages, the real interest rate, the price level and the exchange rate. Provide a detailedeconomic analysis explaining your results with the aid of the diagrams.(b) Repeat part (a) for the case of a fixed exchange rate.32. The Fisher effect creates a 2 points link between and expected profits; unemployment rates O exchange rates; expected profits O inflation rates; unemployment rates O inflation rates; interest rates5:44 PM A p N O filul 20.7 K/s K ECF515-D-1-2021-1.docx 17. With respect to a country having a fixed exchange rate, which of the following state ments is notcorrect? A. The fixed exchange rate system imposes strict discipline on the central bank, B. The economy is vulnerable to foreign but not domestic demand disturbances. C. The Taylor Rule schedule is irrelevant. Q Shifts in world interest rates can pose a risk to the sustainability of the fixed excha nge rate. 18. The Mundell-Fleming framework studies (A) -, (B) orld with (C)__ financial markets and (D) _capital mobility. economies in a w A. (A) small; (B) open; (C) integrated; (D) free B. (A) large; (B) open; (C) integrated; (D) free C. (A) small; (B) mercantilist; (C) integrated; (D) free D (A) large; (B) open; (C) restricted; (D) free 19. Which of the following policy options would simultaneously increase interest rates and d ecrease output? A. The Bank of Zambia sells bonds through open market operations. B. he Government…
