Question 2 Flexible exchange rates and the responses to changes in foreign macroeconomic policy. Suppose the domestic economy is a small open economy and the foreign economy is an important trade partner. The foreign country follows a contractionary monetary policy and increases the foreign interest rate. Use the open economy IS-LM-UIP model to show the effect of the increase in the foreign interest rate, i*, on domestic output (Y) and the exchange rate (E), when the domestic central bank leaves the domestic policy interest rate unchanged. Analytically explain and graphically illustrate the impact of the foreign policy on domestic output, trade balance and exchange rate.

Question 2 Flexible exchange rates and the responses to changes in foreign macroeconomic policy. Suppose the domestic economy is a small open economy and the foreign economy is an important trade partner. The foreign country follows a contractionary monetary policy and increases the foreign interest rate. Use the open economy IS-LM-UIP model to show the effect of the increase in the foreign interest rate, i*, on domestic output (Y) and the exchange rate (E), when the domestic central bank leaves the domestic policy interest rate unchanged. Analytically explain and graphically illustrate the impact of the foreign policy on domestic output, trade balance and exchange rate.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

In an open economy that is on a flexible exchange rate, show the short run effects on output and interest rates of a decrease in money supply. To answer this question, draw the following four diagrams: 1. The goods market, 2. The money market 3. The IS-LM curves, and 4. The interest parity condition. Clearly label the initial and new equilibrium points in each diagram. Provide brief explanations for the changes. What is the effect on net exports?
Which of the following statements is true? A)The open-economy IS curve is derived in the same way that the closed-economy IS curve is derived. B)The closed-economy IS curve is downward sloping, but the open-economy IS curve is upward sloping. C)Some factors that shift the IS curve in the closed economy in one direction will shift the IS curve in the open economy in the opposite direction. D)Factors that raise a country's current net exports, given domestic output and the domestic real interest rate, shift the open-economy IS curve up.
This is not a writing assignment, this is a multiple-choice question Based on the discussion of these two ideas in this chapter which of the below statements would you consider to be INCORRECT? Group of answer choices The PPP only focuses on internationally tradable items, while the exchange rate has a broader focus and includes both internationally tradable and items that are not internationally tradable. Exchage rates include only the values of internationally tradable items, while the PPP includes both internationally tradable items as well as those which are not internationally tradable items but are used by people in different countries. The rate at which one currency can be exchanged for another is the exchange rate. If $25 can purchase a bundle of goods in the U.S. and if a comparable bundle of goods wil cost 750 rubles in Russia, then the PPP between the U.S. dollar and the Russian ruble would be $25=750 Russian rubles.
"Consider an economy experiencing a high inflation rate. The central bank decides to implement a tight monetary policy to control the inflation. Discuss the potential short- term and long-term effects of this policy on inflation, unemployment, and economic growth. Additionally, analyze how this policy might affect the exchange rate and the balance of trade."
Using the monetary model with flexible price to explain: the effects of an increase in real income on domestic economy under flexible exchange rates. Also comment on the weaknesses of monetary model
Help on all parts please.
In the short run of a model with sticky prices, a reduction in the money supply raises the nominal interest rate and appreciates the currency. In this case the country's expected real interest rate will In addition, the real exchange rate, after initially will subsequently The latter movement of the real exchange rate satisfies the real interest parity condition which indicates that a country's currency will be expected to undergo a real depreciation when its real interest rate ▼real interest rates elsewhere.
The Policy Trilemma states that a country or a monetary union cannot pursue the following three policies at the same time a) free capital mobility, a flexible exchange rate, and an independent monetary policy. b) capital controls, a flexible exchange rate, and an independent monetary policy. c) capital controls, a fixed exchange rate, and an independent monetary policy. d) free capital mobility, a fixed exchange rate, and an independent monetary policy.
It is possible to assert that the exchange rate is endogenous in the equation system nx = c1 + c2 y + c2 ex + u, where nx is net exports, y is gross domestic product, and ex is real exchange rate. Defend this assertion.
2) 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."
Consider the model that relates the net export and the real exchange rate. Discuss the impact that imposing an import quota has on the trade position and real exchange rate of an economy. Make sure that you use both words and figures to explain your logic.
Please highlight the correct answer for each of the two questions and if you can please explain why it is correct.