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Identify the ways in
which international
exchange rate arrangements can affect
domestic monetary
policy operations.
Step by step
Solved in 3 steps
- You have been hired as a Marco Economist by the President of the United States to help evaluate the recentannouncement by Federal Reserve chairman Ben Bernanke that the FED will be increasing interest rates again.Ben Bernanke has justified the move on the grounds that the economy continues to be strong. Answer thefollowing questions. Provide a graphical explanation for your answers whenever possible. What is the effect on the foreign exchangemarket (the $ market)? 12. What impact will this have on imports?A. increaseB. decreaseC. remains unchanged 13. What impact does the change in the exchangerate have on aggregate demand?A. increase (shifts to the right)B. decrease (shifts to the left)C. remains unchanged 14. What happens to the aggregate supply curve?A. increase (shifts to the right)B. decrease (shifts to the left)C. remains unchangedMany economists are worried that a high level of budget deficits may lead to inflationary monetary policies inthe future. Could these budget deficits have an effect onthe current rate of inflation?Identify the primary actor in the European money market and briefly outlineits main role as participant. Identify also the four primary participants in the foreignexchange market.(b) Suppose that the European Central Bank had the view that the euro is overvalued relative to the dollar (i.e., the nominal exchange rate between the dollar and theeuro, E$/AC, is too high). How should the European Central Bank regulate the Europeannominal money supply to achieve a depreciation of the euro relative to the dollar?(c) Suppose that the dollar interest rate is 3% and the euro interest rate is 0.5%per year and that the interest parity condition holds in the dollar/euro foreign exchangemarket.(i) Explain the relationship between the interest rate difference and the expected appreciation of the euro against the dollar. By how many percentage is the euro expectedto appreciate?(ii) Suppose that the expected future exchange rate is Ee$/AC= 2.05. Obtain the currentequilibrium exchange rate that…
- (1) In the IS-LM model, how does an increase in money supply affect theIS curve?(2) According to the Impossible Trinity, if an economy wants to allow for free capitalflows as well as to have full control over its currency, which exchange rate systemshould be adopted?(3) In an IS-LM model, if the investors are suddenly less willing to invest, then what effects does this change make to the equilibrium? Explain your intuitions.(4) According to your answers in (3), if the government wants to stabilize the interestrate using monetary policies, how should it behave? If the government, instead, wantsto stabilize the output level using monetary policies, what is your policy suggestion forit?Suppose the Federal Reserve enacts contractionary monetary policy to offset covid-era quantitative easing and avoid long-run inflationary pressure. Use our simultaneous equilibrium model to show the effects of such a policy action on US interest rates as well as the value of the dollar relative to the Japanese Yen.Why is it that in a pure, flexible exchange rate system,the foreign exchange market has no direct effect onthe money supply? Does this mean that the foreignexchange market has no effect on monetary policy?
- 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.Which monetary policy tool can the Federal Reserve use to conduct an expansionary monetarypolicy (please state at least one instrument)? Which monetary policy instrument can the Fed useto conduct a restrictive monetary policy? Assume the country is experiencing highunemployment and a recession, such as during 2001, 2008-2009, and 2020. What is the Fedlikely to do in this scenario? Discuss the effects of such policy on the economy. Can you givea specific example to what the Fed did during any of those recessions? This is not a writing, it is economic.True-False with explanationA monetary expansion only changes inflation on the long run
- Explain why monetarypolicymakers can target any inflation ratein the long run butcannot target a levelof aggregate output inthe long runAnswer the question according to the graph below. Dollar/euro exchange rate, Ese Esie Dollar return Dollar return 2' 2' Ee Expected euro return Ee 4' Expected euro return 3' 1" Ege Rates of return (in dollar terms) R R L(A Yus) L(Ag. Yus) Mis Pis Mis Pis 4 U.S. real US money supply Mus Pus MUs Pus U.S. real U.S. real money holdings money holdings Assume that the U.S. money supply is initially given at M-us, the price level is initially given at P'us, the equilibrium exchange rate is initially at E'sje. US, A temporary increase in the nominal money supply from M'us to M²us in the short-run will result in a new equilibrium at point US US Lütfen birini seçin: O A. 3' O B. 2' O C.1' O D. 4'One of the undesirable effects of contractionary monetary policy is O O A) Higher unemployment. B) Higher inflation. C) Lower net exports.