Consider the COVID-19 pandemic and the ongoing financial developments for building your arguments for the following question. Explain the short-run and long-run effects of the adjustment of the dollar/euro exchange rate following a permanent increase in the U.S. money supply and show those effects on the related diagrams. Suppose the economy starts with all variables at their long-run levels and that output remains constant as the economy adjusts to the money supply change.

Consider the COVID-19 pandemic and the ongoing financial developments for building your arguments for the following question. Explain the short-run and long-run effects of the adjustment of the dollar/euro exchange rate following a permanent increase in the U.S. money supply and show those effects on the related diagrams. Suppose the economy starts with all variables at their long-run levels and that output remains constant as the economy adjusts to the money supply change.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter6: Managing In The Global Economy

Section: Chapter Questions

Problem 4E

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Consider the COVID-19 pandemic and the ongoing financial developments for building your arguments for the following question. a. Explain the short-run and long-run effects of the adjustment of the dollar/euro exchange rate following a permanent increase in the U.S. money supply and show those effects on the related diagrams. Suppose the economy starts with all variables at their long-run levels and that output remains constant as the economy adjusts to the money supply change. b.Explain the exchange rate overshooting with the help of the diagrams that you drew for part a. Why is the exchange rate overshooting an important phenomenon? What does it help to explain?
Part 4 5 6 Answer all questions from this section. For each question, identify the statement as True,False, or Uncertain, and explain your reasoning A.1 Following the announcement that the amount of QE intervention by the central bankwill be reduced going forward (also known as Quantitative Tightening), according to theUIP condition, an immediate appreciation of home’s nominal exchange rate would beobserved. A.2 The difference between the slopes of the IS and RX curves depends only on the sensitivityof net exports to the real exchange rate. A.3 Consider a temporary positive inflation shock in a flexible exchange rate regime (with aninflation targeting central bank) and in a fixed exchange rate regime (where there is nopolicy intervention). Assume that both economies converge to a medium run equilibrium.Following the shock, inflation converges to its equilibrium value from above in both cases.A.4 The central bank of a common currency area should not respond to a shock specific toone…
Answer all questions from this section. For each question, identify the statement as True,False, or Uncertain, and explain your reasoning A.1 Following the announcement that the amount of QE intervention by the central bankwill be reduced going forward (also known as Quantitative Tightening), according to theUIP condition, an immediate appreciation of home’s nominal exchange rate would beobserved. A.2 The difference between the slopes of the IS and RX curves depends only on the sensitivityof net exports to the real exchange rate. A.3 Consider a temporary positive inflation shock in a flexible exchange rate regime (with aninflation targeting central bank) and in a fixed exchange rate regime (where there is nopolicy intervention). Assume that both economies converge to a medium run equilibrium.Following the shock, inflation converges to its equilibrium value from above in both cases.A.4 The central bank of a common currency area should not respond to a shock specific toone member. A.5…
This question considers how the FX market will respond to changes in monetary policy in South Korea. For these questions, define the exchange rate as South Korean won per Japanese yen, Ewon/¥. Use the FX and money market diagrams to answer the following questions. On all graphs, label the initial equilibrium point A. a. Suppose the Bank of Korea permanently decreases its money supply. Illustrate the short-run (label equilibrium point B) and long-run effects (label equilibrium point C) of this policy. b. Now, suppose the Bank of Korea announces it plans to permanently decrease its money supply but doesn’t actually implement this policy. How will this affect the FX market in the short run if investors believe the Bank of Korea’s announcement? Please illustrate your answer graphically as well labeling the short run equilibrium B. c. Finally, suppose the Bank of Korea permanently decreases its money supply, but this change is not anticipated. When the Bank of Korea…
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.
Consider the following: C = 400 + 0.5·(Y – T) I = 80 + 0.1·Y – 1000·(i – πe + x)NX = 0.01·Y*– 0.1·Y – 4·(E – 100) G = 600 T = 480 Y* = 20,000 The central bank anchored inflation expectations at target inflation rate of π̅= 0.02. Household borrowing rates and businesses include a 4% risk premium over policy rate (i) so: x - 0.04. The central bank has set policy rate equal to 2% (, ī = 0.02). The Exchange rate (E) is 100. Expected future exchange rate is also 100. Then assume the governent cuts tax level from T=480 to T′ = 400: a) Find the short run equilibrium level of output and trade balance? a) If the economy was at potential before, what effects will the tax cut form 480 to 400 have on investments and on trade balance in the medium run?
From 2009 to 2011, the economies of Australia andSwitzerland suffered relatively mild effects from theglobal financial crisis. At the same time, many countriesin the euro area were hit hard by high unemploymentand burdened with unsustainably high governmentdebts. How should this have affected the euro/Swissfranc and euro/Australian dollar exchange rates?
1. Suppose in the New Keynesian open-economy model that there is a negative output gap andthe central bank decreases the current money supply.(a) Assuming that the exchange rate is flexible. Draw diagrams for the labour, goods andmoney markets, and the production function. Determine the equilibrium effects of thisdecrease in the money supply on employment, output, consumption, investment, money,real wages, the real interest rate, the price level and the exchange rate. Provide a detailedeconomic analysis explaining your results with the aid of the diagrams.(b) Repeat part (a) for the case of a fixed exchange rate.
Kindly assist in question 2 1)Suppose the ECB keeps the euro rate at 2% forever .The Fed now temporary raises its interest rate this year from 2% to 7% .After this event ,what is the expected rate of dollar depreciation if UIP holds over the coming year ?(Hint :use the approximate UIP formula.) 2) In the last question (1), suppose the policies are temporary, and everyone believes the exchange rate will revert to its expected long run PPP value of $1.26 per euro one year from now .What will be the spot exchange rate ($/€) today?.( hint: use the approximate UIP formula)
Consider the AA-DD model with flexible exchange rates. Assume the economy is initiallyat full employment.a) Suppose a temporary shock to the money demand pushes the economy intorecession. Describe one policy intervention that takes the economy back to its preshock equilibrium position.
European Central Bank will keep its aggressive monetary stimulus that is, expansionary monetary policy in place, where as US will not continue to do so. "With the help of an equation", explain the effect of this on the long run depreciation of the US dollar
In 1992, several European countries had their individual currencies pegged to the ECU (a pre-cursor to the euro) in anticipation of forming a common currency area. In practice, this meant that countries were pegged to the German deutschmark (DM). This question considers how two different countries responded to the European Exchange Rate Mechanism (ERM) Crisis. For the following situations, you need only consider short-run effects. Also, treat Germany as the foreign country. (a) Following the economic consequences of German reunification in 1990, the Bundesbank (Germany’s central bank) raises its interest rate. On September 14, 1992, Great Britain decided to float the British pound (£) against the DM. Using the foreign exchange market, the money market, and treating Britain as the home country, graphically illustrate the effects of Germany increasing its interest rate on Great Britain. (b) After Britain abandoned the ERM (e.g., allowed its currency to float against the DM), investors…