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Assuming a fixed exchange rate policy, discuss the effectiveness of contractionary fiscal policy designed to decrease output.
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- Using Mundell-Fleming model, analyze the effect of a fiscal expansion on the economy under floating and fixed exchange rate regimes. Draw necessary diagrams.Explain why temporary and permanent fiscal expansions do not have different effects under fixed exchange rates, as they do under floating.What is the effect of a fiscal expansion on output and interest rates when exchange rates are fixed and capital is perfectly mobile?
- Explain the expansionary fiscal policy in the short run and long run (ignoring exchange rate and capital flows).For a small open economy with perfect capital mobility, fiscal policy cannot affect real GDP. while expansionary monetary policy will increase its domestic income and employment at the expense of losses abroad TRUE and FALSESECTION 4: TRUE OR FALSE OR UNCERTAIN 25. According to the classical macroeconomic model, expansionary fiscal policy has an inflationary effect. 26. Assuming that you have free capital mobility and fixed exchange rate policy, then fiscal policy has a positive effect on output 27. Expansionary fiscal policy always has a depreciating effect on the domestic exchange rate. 28. According to the relative income hypothesis, the savings rate is a non-linear function of the ratio of current to previous peak income. 29. In the IS-LM-BOP model, macroeconomic adjustments occur through changes in money supply if the country adopts a fixed exchange rate regime. 30. According to the impossible trinity, a country that has a liberalized capital account and independent monetary policy will also achieve a stable exchange rate.
- Assess the validity of the following statement: A fiscal expansion is especially powerful under a managed exchange rate because it leads to an induced monetary expansion.Use an open market IS-LM diagram to explain the result of fiscal expansion under fixed exchange rate system. What will happen to the IS and LM functions,equilibrium output, domestic interest rate, exchange rate level, capital flow, foreign exchange reserve andnet exports? Explain your answerGiven that a country has a large and possibly unsustainable current account deficit, explain how you can reduce it using each of the following approaches: Elasticity approach The absorption approach The monetary approach Suggest solutions to the limitations of each of the three approaches in a) above.
- Assume an open economy with a fixed exchange rate and a credible inflation target. Also assume that the economy is in an expansionary gap, with an inflation that is lower than the target level. Thus, in the short-run, ______ could be used to obtain a quicker stabilization of the economy back to potential output. In the long-run, self-correction is ________ to reach the inflation target. Select one alternative: fiscal policy; preferable monetary policy; preferable None of the alternative solutions provided monetary policy; not preferable fiscal policy; not preferable Climate change is a phenomenon with _______. Select one alternative: None of the alternative solutions provided diminishing marginal returns increasing marginal returns positive externalities negative externalitiesQUESTION 4: PLACE TRUE OR FALSE OR UNCERTAIN (T/F/U) According to the classical macroeconomic model, expansionary fiscal policy has an inflationary effect. Assuming that you have free capital mobility and fixed exchange rate policy, then fiscal policy has a positive effect on output Expansionary fiscal policy always has a depreciating effect on the domestic exchange rate. According to the relative income hypothesis, the savings rate is a non-linear function of the ratio of current to previous peak income. In the IS-LM-BOP model, macroeconomic adjustments occur through changes in money supply if the country adopts a fixed exchange rate regime. According to the impossible trinity, a country that has a liberalized capital account and independent monetary policy will also achieve a stable exchange rate.An economy is described by the following two equations. Y = C (Y – T) + I (r* ) + G – NX(e) M/P = L(r*, Y) If the taxes are raised in this economy, and assuming a floating exchange rate regime; explain what happens to: i. Aggregate income,
