2. The IS- LM -UIP Model Consider an economy that experiences an increase in consumer confidence. Let UIP stand for the uncovered interest parity condition. Suppose the economy has a flexible exchange rate. In an IS - LM - UIP diagram, show the effect of the increase in consumer confidence on output, the interest rate, and the exchange rate. ( You must draw the graphs) b. (Following (a)) How does the change in the exchange rate, by itself, tend to affect output? Does the change in the exchange rate dampen (make smaller) or amplify (make larger) the effect of the increase in confidence on output? c. Suppose instead the economy has a fixed exchange rate. In an Is - LM -UIP diagram, show effect of the increase in consumer confidence on output, the interest rate. What must happen to the money supply in order to maintain the fixed exchange rate? ( You must draw the graphs) d. How does the effect on output in this economy, with fixed exchange rates, compared to the effect you found for the economy for part (a), with flexible exchange rates?

2. The IS- LM -UIP Model Consider an economy that experiences an increase in consumer confidence. Let UIP stand for the uncovered interest parity condition. Suppose the economy has a flexible exchange rate. In an IS - LM - UIP diagram, show the effect of the increase in consumer confidence on output, the interest rate, and the exchange rate. ( You must draw the graphs) b. (Following (a)) How does the change in the exchange rate, by itself, tend to affect output? Does the change in the exchange rate dampen (make smaller) or amplify (make larger) the effect of the increase in confidence on output? c. Suppose instead the economy has a fixed exchange rate. In an Is - LM -UIP diagram, show effect of the increase in consumer confidence on output, the interest rate. What must happen to the money supply in order to maintain the fixed exchange rate? ( You must draw the graphs) d. How does the effect on output in this economy, with fixed exchange rates, compared to the effect you found for the economy for part (a), with flexible exchange rates?

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter32: A Macroeconomic Theory Of The Open Economy

Section: Chapter Questions

Problem 3PA

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Give typing answer with explanation and conclusion Consider the exchange rate between U.S. Dollar and Mexican Peso: USD/MXN. Initially, the supply curve for USD is 100 + eN bln dollars per week and the demand curve is 140 - eN bln dollars per week. There is a financial crisis in Mexico and the government fears that it may lead to capital outflows that would make the crisis even worse. They decide that if Mexican Peso depreciates by more than 20% the central bank will step in and fix the exchange rate. As the crisis unfolds the demand for the U.S. dollars increases to 142 - eN and the supply of dollars falls to 99 + eN. How should the central bank of Mexico react to this change?
E1 The higher the value of e, the ______________(More or less) units of foreign currency a dollar buys. When a nominal exchange rate goes up, we say the domestic currency is _________(appreciating or depreciating) against the foreign currency. When a nominal exchange rate goes down, we say that the domestic currency is _________(depreciating or appreciating) against the foreign currency.
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Suppose the real exchange rate is 10, the domestic price level is 8, and the foreign price level is 4. (i) What is the nominal exchange rate?Use the expression: ,where ereal is real exchange rate, enor is nominalexchange rate, P is domestic price level and Pfor, is foreign price level (ii) Suppose the real exchange rate rises by 10%, the inflation rate in the domestic country is 6%, and the inflation rate in the foreign country is 4%. By what percentage does the nominal exchange rate change?
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1. Given the equilibrium of IS and LM, an increase in the equilibrium interest rate would cause the equilibrium exchange rate to ________. A. decrease if foreign interest rates were constant B. increase if foreign interest rates were constant C. decrease if foreign interest rates decreased D. increase if foreign interest rates increased 2. Assuming an economy where the level of output (Y) is below potential, if an increase in government spending (G) shifts output towards potential, it is likely there will be ____ no change a decrease an increase in the interest parity relation. 3. An expansionary fiscal policy has a greater effect on output in an economy with fixed exchange rates than in an economy with flexible exchange rates, because A. the LM curve shifts up under fixed exchange rates and hence the short-run equilibrium has an output greater than under the flexible exchange rates. B. the money supply is not a…
(b) Suppose the real exchange rate is 10, the domestic price level is 8, and the foreign price level is 4. (i) What is the nominal exchange rate? Use the expression: ereal= enor*P / Pfor where ereal is real exchange rate, enor is nominal exchange rate, P is domestic price level and Pfor is foreign price level. (ii) Suppose the real exchange rate rises by 10%, the inflation rate in the domestic country is 6%, and the inflation rate in the foreign country is 4%. By what percentage does the nominal exchange rate change?
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