hes V. Assume: Flexible Exchange Rates Keynesian Perfect Capital Markets Small Country would be dim 1) Trace through the effects of a shock involving an increase in M. Graphically illustrate. 2) Compare the effectiveness of the shock in part (1) for open v. closed economies. Explain. 3) In general, how is the international adjustment following monetary shocks different for fixed v. flexible exchange rates? How does this basic difference relate to the effectiveness of policy? Graphically illustrate your answer the IS- LM diagram. 4) How would your answer to part (1) be different for a large country? Explain. CS Scanned with CamScanner

hes V. Assume: Flexible Exchange Rates Keynesian Perfect Capital Markets Small Country would be dim 1) Trace through the effects of a shock involving an increase in M. Graphically illustrate. 2) Compare the effectiveness of the shock in part (1) for open v. closed economies. Explain. 3) In general, how is the international adjustment following monetary shocks different for fixed v. flexible exchange rates? How does this basic difference relate to the effectiveness of policy? Graphically illustrate your answer the IS- LM diagram. 4) How would your answer to part (1) be different for a large country? Explain. CS Scanned with CamScanner

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter29: Exchange Rates And International Capital Flows

Section: Chapter Questions

Problem 25CTQ: If a countrys currency is expected to appreciate in value, what would you think will be the impact...

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In an open economy, a permanent beneficial suply shock (s< 0)implie tha the domestic real exchange rate wil: Oappreciate as the est of the word buys the domestic curency Oremain unchanged because of fsetig movements n he domestic prie level Oremain unchanged because of ffseting movements in realinteret rates Odepreciate so as to crowd-in net exports
Answer the following questions 1.a. Today many Central Banks around the World are thinking of increasing interestrates. Why? What could be the dangers of increasing those interest rates toomuch?1.b.What will happen to the trade balance and the real exchange rate of a smallopen economy when govemment purchases increase, such as during a war?Does your answer depend on whether this is a local war or a global war? Onthose grounds, In the current situation of the Russian invasion, what shouldhappen between the dollar and the Euro?
A case study in the chapter analyzed purchasingpower parity for several countries using the pricc ofBig Macs. Here arc data for a few more countries: a. For each country, compute the predicted exchangerate of the local currency per U.S. dollar. (Recallthat the U.S. price o( a Big Mac was $4.93.)b. According to purchasing-power parity, what is thepredicted exchange rate between the Hungarianforint and the Canadian dollar? What is the actualexchange rate?c. How well docs the theory of purchasing-powerparity explain exchange rates?
QUESTION 1 Consider an OLG economy where each generation has 20 bananas when young, and 0 bananas when old. Suppose central bank prints out 2 unit of money, give to gen 0 for free. Solve for equilibrium exchange rate "1 money - ?? bananas". QUESTION 2 Under the equilibrium exchange rate you solved in the previous question, what is cy for each generation with money? QUESTION 3 Under the equilibrium exchange rate you solved in the previous question, what is co for each generation with money?
What is happening to the U.S. real exchange rate ineach of the following situations? Explain.a. The U.S. nominal exchange rate is unchanged,but prices rise faster in the United States thanabroad.b. The U.S. nominal exchange rate is unchanged, butprices rise faster abroad than in the United States.c. The U.S. nominal exchange rate declines, andprices are unchanged in the United States andabroad.d. The U.S. nominal exchange rate declines, andprices rise faster abroad than in the United States.
Tools Consider two similar restaurants In dose proximity to each other on elther side of the U.S.-Mexico border. Suppose the dollar depreciates agalnst the peso. The following graph shows the supply and demand curves for meals at the restaurant on the Mexican side of the border. On the following graph, shtft erther the supply curve or the demand curve to represent the effect of the devaluation of the dollar agalnst the peso on the market for meals at the restaurant on the Mexican side of the border. (? O D D. QUANTITY (MEALS) The dollar devaluation harms PRICE (Pesos)
Consider a country with a flexible exchange rate, and which initially has a current account surplus of zero. Then, suppose there IS an anticipated InCrease in tuture total tactor productivity. a) Determine the eauilibrium etects on the domestic economv in the case where there are no capita. controls. In particular, show that there will be a current account dehicit when arms and consumers anticipate the increase in future total factor productivity. b) Now, suppose that the government dislikes current account deficits, and that It imposes capital controls in an attempt to reduce the current account deficit. With the anticipated increase in future total factor productivity, what will be the equilibrium efects on the economy? Do the capital controls have the desired efect on the current account deficit? Do capital controls dampen the effects of the shock to the economy on output and the exchange rate? Are capital controls sound macroeconomic policy in this context? Why or why not?
Which of the following is NOT a pro of having a fixed exchange rate policy? OO O a. Anchors inflationary expectations b. None of the above O c. O d. Less uncertainty in trade Hides the true cost of external borrowing
Suppose that Americans decide to increase theirsaving.a. If the elasticity of U.S. net capital outflow withrespect to the real interest rate is very high, willthis increase in private saving have a large orsmall effect on U.S. domestic investment?b. If the elasticity of U.S. exports with respect to thereal exchange rate is very low, will this increase inprivate saving have a large or small effect on theU.S. real exchange rate?
Consider an OLG economy where each generation has 50 bananas when young, and 10 bananas when old. Suppose central bank prints out 4 unit of money, give to gen 0 for free. Solve for equilibrium exchange rate "1 money = ??? bananas". Consider an OLG economy where each generation has 20 bananas when young, and 12 bananas when old. Suppose central bank prints out 2 unit of money, give to gen 0 for free. Solve for equilibrium exchange rate "1 money = ??? bananas".
Question 10 d Anwser only question d please thank you Assume that there is a free-floating exchange rate. Will the following cause sterling toappreciate or depreciate relative to other currencies? In each case, you should considerwhether there is a shift in the demand or supply curves of sterling (or both) and whichway the curve(s) shift(s). You may assume that the impacts are ceteris paribus, that is,everything else remains the same. Illustrate your answers and give a short explanation interms of currency supply and demand.(a) UK imports increase. (b) UK interest rates rise relative to those abroad. (c) The UK experiences lower inflation than other countries, but with no change in interestrates. (d) Forex speculators believe that the Pound sterling will depreciate.
QUESTION 3 Consider an OLG economy where each generation has 20 bananas when young, and 0 bananas when old. What is the lifetime happiness of each generation without money? 5 QUESTION 4 Consider an OLG economy where each generation has 2O bananas when young, and 0 bananas when old, Suppose central bank prints out 2 unit of money, give to gen 0 for free. Solve for equilibrium exchange rate "1 money = ??? bananas". 10 QUESTION 5 Under the equilibrium exchange rate you solved in the previous question, what is cy for each generation with money? QUESTION 6 Under the equilibrium exchange rate you solved in the previous question, what is co for each generation with money? QUESTION 7 Under the equilibrium exchange rate you solved in the previous question, what is the lifetime happiness for each generation with money?