(6) C=₂Y²+1^*) + c₂(Fot¹ / P²)where 00.The balance sheet of commercial banks is(7) L=D+LºWhere L = Pº denotes loans to firms, and L" borrowing from the central bankThe interest rate on domestic deposits is(8) P=PWhere I is the cost of borrowing from the central bank, or the refinance rate.The interest rate on loans is(9) F=F+eWhere is a premium, defined as(10) e (P Ko-Lo)Where Lis beginning-of-period loans and esoThe equilibrium condition of the market for domestic goods is(11) X(z)=(1-deltalC+1+G,Where G is government spending, X exports, z = E/ (P) the real exchange rate (defined such that anincrease is a depreciation), X=gX/gz> 0 and 0 Consider a small open economy producing a good which is an imperfect substitute for a foreign good.There are five categories of agents: firms, households, commercial banks, the central bank, and thegovernment. The world price of the foreign good is taken as exogenous and normalized to unity. Thenominal exchange rate, E, is flexible.The supply of the domestic good is given by(1) ys* y* (po)*Where Pº is the price of the domestic good and Y³=dY²³ /d PD > 0Investment, I, is financed by bank loans and is defined as(2) 1=()Where is the loan rate and I' <0.Households hold three categories of assets: cash (which bears no interest), deposits with domesticbanks, and foreign-currency deposits abroad. Assets are imperfect substitutes. Household financialwealth, F^ H is defined as:(3) P¹=M+D+E.D"Where M is cash holdings, and D (respectively, D") domestic (respectively, foreign) deposits.The demand for deposits is(4) M/D=m,Where IP is the interest rate on domestic deposits, and m> 0 is a constant coefficient.The demand for foreign deposits depends on the domestic and foreign interest rates:(5) ED* /F" =h(*).Where Fo" is the predetermined component of household financial wealth, Esthe nominal exchangerate at the beginning of the period, the interest rate on domestic deposits, į" the interest rate onforeign deposits, and he is a share function with partial derivativesah/ai<<0, ah/ai"* = hi*>0.Household consumption spending, C, depends on factor income, interest rates, and wealth:

Monetary policy is the arrangement of moves made by a country's central bank to control the money…

(6) C=C₂Y³²-(+i^*) + c(Fut/P) where 00. The balance sheet of commercial banks is (7) L=D+Lº Where L = P1 denotes loans to firms, and Lº borrowing from the central bank The interest rate on domestic deposits is (8) P=F Where I is the cost of borrowing from the central bank, or the refinance rate. The interest rate on loans is (9) F=F+e Where is a premium, defined as (10)ee (P Ko-Lo) Where Le is beginning-of-period loans and so The equilibrium condition of the market for domestic goods is (11)Y-X(z)=(1-delta)C+1+G, Where G is government spending, X exports, z = E/ (P) the real exchange rate (defined such that an increase is a depreciation), X = X/>0 and 0

(6) C=C₂Y³²-(+i^*) + c(Fut/P) where 00. The balance sheet of commercial banks is (7) L=D+Lº Where L = P1 denotes loans to firms, and Lº borrowing from the central bank The interest rate on domestic deposits is (8) P=F Where I is the cost of borrowing from the central bank, or the refinance rate. The interest rate on loans is (9) F=F+e Where is a premium, defined as (10)ee (P Ko-Lo) Where Le is beginning-of-period loans and so The equilibrium condition of the market for domestic goods is (11)Y-X(z)=(1-delta)C+1+G, Where G is government spending, X exports, z = E/ (P) the real exchange rate (defined such that an increase is a depreciation), X = X/>0 and 0

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter19: International Finance And The Foreign Exchange Market

Section: Chapter Questions

Problem 12CQ

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