(B). Diagram 2: The DD -AA model Exchange rate, E DD E AA Output, Y Use the DD-AA model to compare the domestic economic response under flexible and fixed exchange rate regimes to a temporary rise in export demand from foreign countries.
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- Exchange rates are an important factor when doing business internationally. Please discuss: a. Potential mechanisms through which exchange rates affect revenues of multinational enterprises (MNEs) doing foreign direct investment (FDI) in a given foeign countryn (include atleast 3 mechanisms ). b. What stratergies can MNEs employ to hedge against the risks of stemming from foreign exchange (include atleast two potential stratergies).1) Mundell – Fleming modela) Assuming perfect capital mobility and flexible exchange rates, explain theimpact on the Irish economy of a decrease in interest rates in the U.S. In youranswer, clearly indicate the effect on income, rate of interest, balance ofpayments. (Show your answer with the help of an IS-LM-BP diagram andexplain the mechanisms. Consider Ireland a small open economy with flexibleexchange rates. b) Is Monetary and Fiscal policy effective in the case of question (a)? Explainwith graphs. c) Discuss the notion of unholy trinity.(a). Use the DD-AA model to examine the effects of an one-time rise in the foreign price level, P* given that the future exchange rate Ee falls immediately in proportion to P*. If the economy is initially in internal and external balance, will its position be disturbed by such a rise in P*? (b). Use the DD-AA model to compare the domestic economic response under flexible and fixed exchange rate regimes to a temporary rise in export demand from foreign countries.
- Suppose, in the New Keynesian open economy model, that there is a negative shock in future total factor productivitv and there are no capital controls. a) Under a flexible exchange rate, what are the equilibrium effects? b) Now suppose that there is a fixed exchange rate. Repeat part(a)Discuss the drawbacks of primary-sector-intensive outward-looking trade policies. How didthe Prebisch-Singer hypothesis critique such policies and support the implementation of importsubstitution industrialization (ISI) strategies? Also discuss the similarities and differencesbetween export-oriented industrialization strategies versus ISI. Which of these policies would beassisted by an undervalued exchange rate? Explain .5 3.Using an appropriate diagram, show the deadweight loss following the introductionof a tax on a good. Distinguish between the changes in consumer surplus andproducer surplus.5. Using an appropriate diagram, under a floating exchange rate regime show how adecrease in demand for a country’s exports would affect the exchange rate of thedomestic currency.
- PQ 11. In a sytem of fixed exchange rates, the automatic balance-of-payments adjustment process for a country with a balance of payments defficit would theoreticallly involve, among other things, a(n) in the interest rate and a(n)in national income. a. decrease / decrease b. decrease / increase c. increase / decrease d. increase / increaseQuestion 3 The yen is very strong against the US dollar due to increased supply of dollars and hasmoved from 120 yen/$1 to 105 yen/$1. The Bank of Japan decides to intervene by sellingyen and buying US dollars. The intervention is of the non sterilized kind. Using a diagramfor the supply and demand for dollars in the forex market, illustrate and comment on theintervention undertaken by the Bank of Japan. On a separate diagram show the impactof the intervention on the overall Japanese yen money supply and demand conditions.The demand for Australian dollars in the foreign exchange market equals 14000 – 3000e and thesupply of Australian dollars in the foreign exchange market equals 2000 + 2000e, where e is thenominal exchange rate expressed in euros per Australian dollar. If the Australian dollar is fixed at 2euros per Australian dollar, then to maintain this fixed rate, what is the required change in theReserve Bank of Australia’s holdings of euros? 1increase by 4000 euros 2decrease by 2000 euros 3decrease by 4000 euros 4increase by 2000 euros
- True / False Question , explain breifly ( 3 sentences would be enough ) 1. A trade deficit must be offset by foreign savings. 2. Imports into Japan are positively correlated with the value of the yen. 3. The purchasing power parity (PPP) hypothesis is that the real exchange rate willadjust so that the purchasing power of a currency will be the same in every country.No gpt oir Al response please Question 8:Consider that you are a forex trader looking to profit from the carry trade strategy. You notice that the interest rate in Country A is 1% and in Country B it is 5%. You decide to borrow in the currency of Country A and invest in the currency of Country B.1) What is your expected profit from the interest rate differential alone, assuming no change in the exchange rate?2) Now, suppose that over the course of your investment, the currency of Country A appreciates against the currency of Country B by 2%. How does this affect your carry trade strategy and what would be your overall profit or loss?Q 1Using the DD-AA model, explain the effects of temporary fiscal and monetary changes performed by a domestic country listed below. For each change, pro- vide diagrammatic explanation and comment on what happens to the nominal exchange rate (under a floating exchange rate regime), domestic output, and domestic CA (current account). (a) Tax raise. (b) Lower domestic money supply. Question 2 For each of the fiscal and monetary changes listed in Question 1, describe one fiscal or monetary policy aiming to maintain full employment level. For the policy you pick, provide a diagrammatic explanation using DD-AA model and comment on what happens to the nominal exchange rate, domestic output, and domestic CA as a result of the policy you choose.