Read the following paragraph. Let Turkey be the domestic country. WHEN an emerging market loses favour with its creditors, how should its government respond? The policy prescriptions do not typically include intimidating the central bank, railing against the "interest-rate lobby", falling out with allies, eschewing the IMF's help, pouring scorn on the dollar or appointing the president's son-in-law as finance minister. Turkey has done all of these things, and its currency has duly lost 40% of its value this year. Illustrate the movement of the exchange rate described using the Asset Model. Explain any shifts of or along curves. Assume that before the Turkish currency lost 40% of its value, it was operating at full employment. Illustrate the immediate effect of the currency’s fall in value, if any, on the IS curve. Explain any shifts of or along the curve. Be sure to include potential effects on Y and P. Assuming there are no other shocks to the economy, discuss the long run implications of the currency’s fall in value. Use the appropriate economic relationships to analyze the long run effects. Explain any shifts of or along the curve. Be sure to include potential effects on Y and P. Now, reconsider the assumption that Turkey enters this situation in a position of long run equilibrium. In fact, the economy had already been suffering from a general lack of confidence. If Turkey had been in a position below full employment before the fall in the currency’s value, would that alter your answers to parts a, b or c above? Discuss thoroughly.
6.
Read the following paragraph. Let Turkey be the domestic country.
WHEN an emerging market loses favour with its creditors, how should its government respond? The policy prescriptions do not typically include intimidating the central bank, railing against the "interest-rate lobby", falling out with allies, eschewing the IMF's help, pouring scorn on the dollar or appointing the president's son-in-law as finance minister. Turkey has done all of these things, and its currency has duly lost 40% of its value this year.
Illustrate the movement of the exchange rate described using the Asset Model. Explain any shifts of or along curves.
Assume that before the Turkish currency lost 40% of its value, it was operating at full employment. Illustrate the immediate effect of the currency’s fall in value, if any, on the IS curve. Explain any shifts of or along the curve. Be sure to include potential effects on Y and P.
Assuming there are no other shocks to the economy, discuss the long run implications of the currency’s fall in value. Use the appropriate economic relationships to analyze the long run effects. Explain any shifts of or along the curve. Be sure to include potential effects on Y and P.
Now, reconsider the assumption that Turkey enters this situation in a position of long run equilibrium. In fact, the economy had already been suffering from a general lack of confidence. If Turkey had been in a position below full employment before the fall in the currency’s value, would that alter your answers to parts a, b or c above? Discuss thoroughly.
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