Justify the following statements graphically or algebraically:(a) In the flexible exchange rate regime, in the presence of static exchange rate expectations (x = 0), an isolated increase in foreign income is(dYa > 0) has no income effects at home (dY = 0). This statement holds for ¨ any degree of international capital mobility k, i.e. also in the limiting cases k = 0 and k = 0.limiting cases k = 0 and k = ∞. Note: Show this only for the two limiting cases. limiting cases.

Suppose, in the New Keynesian open economy model, that there is a negative shock in future total factor productivitv and there are no capital controls. a) Under a flexible exchange rate, what are the equilibrium effects? b) Now suppose that there is a fixed exchange rate. Repeat part(a)

Assume Australia to be home and Vietnam to be the foreign economy. If the real exchange rate q between Australia and Vietnam is 0.7 and the inflation rate differential (home inflation – foreign inflation) is -1%, given a 15% speed of convergence, what would be the expected rate of change in the nominal exchange rate (dollar per dong)?

In general, currency crises are associated with severe falls in economic activity. However, a good part of the first- and second-generation currency crisis models does not explicitly model the factors that could explain the recession. Consider a small, open economy with a fixed exchange rate regime and in which investors depend both on the real interest rate, r, as well as a variable, θ, which can be interpreted as a variable associated with the risk of a currency crisis, according to the perception of the agents. Therefore, the investment function can be written as where g1 and g2 are constant positive parameters. For the sake of simplification, assume that variable θ possesses binary behavior, as following described: a. Explain why the perception of a currency crisis negatively affects investments. b. Based on what has been seen in this chapter, especially in what refers to the asset balance sheet currency mismatch of financial institutions, explain how a proxy…

Given perfect capital mobility and aggregate demand expressed as shown in the image, Solve for the exchange rate e as a function of income. Determine the equilibrium exchange rate as a function of exogenous variables.

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.

2) Exchange rates and interest rates are connected through the parity conditions. Let the New Zealand interest rate be 5% per annum, the US interest rate be 10% per annum, the spot exchange rate be 0.8USD/1 NZD, and the one year forward exchange rate to be 0.85USD/1 NZD. a) What is the return, in NZD, a New Zealand financial trader would get if they invested 1 NZD in New Zealand? b) What is the return, in NZD, an New Zealand financial trader would get if they invested 1 NZD in the US? [Hint: you'll have to exchange that NZD for USDI] c) As you should find, the values given mean the parity condition does not hold. Given the interest rates are fixed, what will happen to the value of the spot exchange rate now? Think about this in terms of demand and supply for the NZD in the FOREX market, and you may draw out a diagram if you wish. d) Now repeat c) for the change in value of the forward exchange rate.

Consider an economy that lasts for two periods, period 1 and period 2. Let TB1 denotes the trade bal- ance in period t, CA the current account balance in period 1, and Bf the country's net international investment position at the end of period 1. Let r denote the interest rate paid on assets held for one period. Assume net international payments to employees, net unilateral transfers, and valuation changes are always equal to zero, so that in period t = 1,2: CA = r B_1 = TB and CA = B - B²_1 %3D A) Which conditions are needed to show that B; = 0? %3D B) Suppose that the country runs perpetual trade deficits. What can you tell about the country's initial net foreign asset position? Justify your answer. C) If the country starts period 1 with no debt or assets, what can you say about the current account in periods 1 and 2?

Consider an economy that lasts for two periods, period 1 and period 2. Let TBị denotes the trade bal- ance in period t, CA, the current account balance in period 1, and B; the country's net international investment position at the end of period 1. Let r denote the interest rate paid on assets held for one period. Assume net international payments to employees, net unilateral transfers, and valuation changes are always equal to zero, so that in period t = 1,2: CA; = rB;_ = TB, and CA = B; – B-1 C) If the country starts period 1 with no debt or assets, what can you say about the current account in periods 1 and 2?

Assume that the expected future exchange rate is unchanged and that the central bank holds the real money supply fixed. Solve for the new equilibrium output Y, equilibrium interest rate i and equilibrium exchange rate E.