Homework Help is Here – Start Your Trial Now!
Business
Economics
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 assume 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 the same exercise but with shocks to US aggregate demand (Fiscal shocks, etc.). Do US ag- gregate demand shocks transmit positively or negatively to Panama? TTS Jell

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 assume 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 the same exercise but with shocks to US aggregate demand (Fiscal shocks, etc.). Do US ag- gregate demand shocks transmit positively or negatively to Panama? TTS Jell

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
See similar textbooks
icon
Related questions
Question

do a b c question

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 the same exercise but with shocks to US aggregate demand (Fiscal shocks, etc.). Do US ag- gregate demand shocks transmit positively or negatively to Panama? Now, suppose that Panama abandons its exchange rate peg to the US dollar. (c) Repeat part (a) under this scenario. (d) Repeat part (b) under this scenario. (e) Suppose that the goal of US monetary policy is to stabilize US output: when US aggregate demand increases (declines) beyond the natural level, US monetary authority contracts(expands) the money sup- ply. You also observe that aggregate demand shocks in the US and in Panama are correlated. In other words, when the US experiences an increase (decline) in its aggregate demand, Panama tends to experi- ence an increase (a decline) in its aggregate demand as well. Would a pegged exchange rate regime have a stabilizing effect on Panama's output? What if aggregate demand shocks in the US and Panama are uncorrelated (either move in opposite directions or do not occur at the same time)? (f) List the possible factors that might make the spillover effect stronger or weaker. (e.g. openness, degree of trade with the US, etc) Explain how those factors affects the above answers.
Transcribed Image Text: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 the same exercise but with shocks to US aggregate demand (Fiscal shocks, etc.). Do US ag- gregate demand shocks transmit positively or negatively to Panama? Now, suppose that Panama abandons its exchange rate peg to the US dollar. (c) Repeat part (a) under this scenario. (d) Repeat part (b) under this scenario. (e) Suppose that the goal of US monetary policy is to stabilize US output: when US aggregate demand increases (declines) beyond the natural level, US monetary authority contracts(expands) the money sup- ply. You also observe that aggregate demand shocks in the US and in Panama are correlated. In other words, when the US experiences an increase (decline) in its aggregate demand, Panama tends to experi- ence an increase (a decline) in its aggregate demand as well. Would a pegged exchange rate regime have a stabilizing effect on Panama's output? What if aggregate demand shocks in the US and Panama are uncorrelated (either move in opposite directions or do not occur at the same time)? (f) List the possible factors that might make the spillover effect stronger or weaker. (e.g. openness, degree of trade with the US, etc) Explain how those factors affects the above answers.
Expert Solution
steps

Step by step

Solved in 5 steps with 3 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Methods For Reducing Risk And Uncertainty
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS