Exercise 3The IS-LM model extension to the open economy is known as the Mundell-Fleming model. Theequilibrium in the goods market (IS) is given byY = C+1+G+ NXThe LM is given by i= T. And the interest parity relation given by:E=E° (1+i)/(1+i*)What is the impact of a reduction in domestic taxes on output, the domestic interest rateand the nominal exchange rate?а.b. Now assume there is a peg in the nominal exchange rate, such that the country is in afixed exchange rate regime. How does your answer in (a) change in this case?C.Going back to the flexible exchange rate regime, what is the impact of an increase indomestic interest rate on output and the nominal exchange rate?d. In an open economy, is the impact of a change in the domestic interest rate on output largeror smaller than in a similar one which is a closed economy?

Since, you have asked a question with multiple sub parts, we will be answering the first three parts…

The IS-LM model extension to the open economy is known as the Mundell-Fleming model. The equilibrium in the goods market (IS) is given by Y = C+1+G+ NX The LM is given by i= ī. And the interest parity relation given by: E=E° (1+i)/(1+i*) а. What is the impact of a reduction in domestic taxes on output, the domestic interest rate and the nominal exchange rate?

The IS-LM model extension to the open economy is known as the Mundell-Fleming model. The equilibrium in the goods market (IS) is given by Y = C+1+G+ NX The LM is given by i= ī. And the interest parity relation given by: E=E° (1+i)/(1+i*) а. What is the impact of a reduction in domestic taxes on output, the domestic interest rate and the nominal 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

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.
The Federal Open Market Committee of the Federal Reserve (the Fed) announced a rate hike of half a percentage point after its two-day meeting on May 4, 2022, raising the target range for the federal funds rate to 0.75-1.0%. Using the IS-LM-IP model, graphically illustrate and explain what HKMA must do to maintain the pegged exchange rate. Also discuss what effect this will have on domestic output and net exports. In your graphs, clearly label all curves and equilibria.
Assume that the interest rate is given and equal to i =i0 and also that the real exchange rate is constant. We assume aggregate spending by domestics residents is A = A + cY - bi and net exports, NX are given by Q = Q + mY, where Q is autonomous import spending. Exports are given and equal to X = X. A) What is the total demand for domestic goods. B)What is the equilibrium level of income? Faiz oranının verildiğini ve i = i0'a eşit olduğunu ve ayrıca reel döviz kurunun sabit olduğunu varsayalım. Yerli sakinlerin toplam harcamalarının A = A + cY olduğunu varsayıyoruz - iki ve net ihracat, NX, Q = Q + mY ile verilir, burada Q otonom ithalat harcamasıdır. İhracat verilir ve X = X'e eşittir.A) Yerli malı için toplam talep nedir?B) Denge gelir düzeyi nedir?
Question 2 Consider an economy that lasts for two periods, period 1 and period 2. Let T B1 denotes the trade balance in period t, CA1 the current account balance in period 1, and B*1 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: CAt =rB*t-1 =TBt (1) and CAt = B*t − B*t-1 (2) A) Which conditions are needed to show that B*2 = 0? 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?
Suppose that you are given the following model for the goods market: C=100 +0.4(Y-T), I=20+.1 Y-200r, G=400, X=200 +0.2Y*-10e, IM=300 +0.3Y+10e and you know that r = 2%, Y*=1,500, e=1 and T =50. Note: e= real exchange rate. The equation for the demand for domestic goods (Z) is and the multiplier for this economy is If the economy were closed, the equation for the demand for domestic goods (Z') would be and the multiplier for the closed economy would be Z = 576 + 0.2Y; multiplier open eco is 2; Z' = 526 + 0.5Y ; multiplier closed eco is 4 O Z = 1000+ 0.4Y; multiplier open eco is 1.67; Z' = 500+ 0.5Y ; multiplier closed eco is 5 Z = 676 + 0.2Y; multiplier open eco is 5; Z' = 496 + 0.5Y; multiplier closed eco is 2 OZ = 576 +0.2Y; multiplier open eco is 5 ; Z' = 500+ 0.4Y; multiplier closed eco is 1.67
Exercise 3 The IS-LM model extension to the open economy is known as the Mundell-Fleming model. The equilibrium in the goods market (IS) is given by Y = C+1+G+ NX The LM is given by i= i. And the interest parity relation given by: E=E° (1+i)/(1+i*) What is the impact of a reduction in domestic taxes on output, the domestic interest rate and the nominal exchange rate? а. b. Now assume there is a peg in the nominal exchange rate, such that the country is in a fixed exchange rate regime. How does your answer in (a) change in this case? С. Going back to the flexible exchange rate regime, what is the impact of an increase in domestic interest rate on output and the nominal exchange rate? d. In an open economy, is the impact of a change in the domestic interest rate on output larger or smaller than in a similar one which is a closed economy?
Consider an open economy operating under fixed exchange rates. Using the goods market equilibrium condition, illustrate the effect of an increase in the foreign interest rate i * on domestic output and net exports. Explain and give economic intuition for your answer.
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)
shows the expected effect on the value of the USD/EUR exchange rate under such monetary stimulus
Consider the following information about a small open economy:Y=1000;C=100+.75(Y-T);I=100-5r;G=100;T=100;NX=250-16E;r*=4.Find the equilibrium real exchange rate.
Discuss why the devaluation of domestic currency improves net exports in the extended version of the DD-AA model. Use a diagram in support of your answer.
Select Correct Option: Suppose the exchange rate was 104 yen per dollar in 2017 and 110 yen per dollar in 2018. The dollar -------------in value and the yen -------------- in value. A) increased B) decreased Did the dollar appreciate or depreciate?