Demonstrate using three diagrams the impact of a budget surplus on the real interest rate, net capital flows and the real exchange rate, using the model of the open economy studied in class (Diagrams required).
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- Demonstrate using three diagrams the impact of a budget surplus on the real interest rate, net capital flows and the real exchange rate, using the model of the open economy studied in class (Diagrams required).
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- Assume real income increased in the United States. Draw a correctly labeled graph of the foreign exchange market for the yen, and show the effect of the increased real income in the United States on the equilibrium exchange rate for the yen.In the Mundell-Fleming model of the open-economy, what is: A. The condition for equilibrium in the product market? B. The condition for equilibrium in the money market? C. The condition for equilibrium in the foreign exchange market?Contrast floating exchange rates, a soft peg, hard peg, and merged currency as options that a country’s economy has in terms of managing its exchange rate relative to the rest of the world. For each, give a benefit as well as a drawback.
- In the Mundell-Fleming model for a small open economy with flexible exchange rates, if the economy is operating at above the natural level in the short run, then in the long run the price level will rise, the exchange rate will ______, and net exports will ______ to restore the economy to its natural rate. a) depreciate; increase b) appreciate; decrease c) depreciate; decrease d) appreciate; increaseDiscuss the strong and weak points of the flexible exchange rate system? What are the strong and weak points of the fixed exchange rate system? Do you agree or disagree? Explain your answer.Consider the following open economy. The real exchange rate is fixed and equal to one. Consumption,investment, government spending, and taxes are given by:C = 8 + 0.6(Y - T), I = G = T = 0.Imports/ exports are given by:Q = 0.4Y, X = 0.4Y*,where an asterisk denotes a foreign variable. if the domestic government increases spending by 6 units as in b) and G=0in the foreign country, the equilibrium output in the domestic country increases by units, and the trade balance in equilibrium is Now, suppose that the two countries coordinate in their fiscal policy. Both countries set atarget level of output of 30 and agree to increase G at the same amount. The common increase in Gnecessary to achieve the target output is and the trade balance is
- Which of the following is true? A. Exchange rate pass-through is a measure of the response of exchange rates to changes in imported and exported product prices. B. The Black Death contributed to a dramatic cumulative GDP fall of 29% in England and to a ‘flight-to-safety’ decrease in the price of gold by 8% between 1348 and 1351. C. Relatively low real interest rates at home should normally stimulate an outflow of capital seeking higher rates elsewhere. D. Capital flight—the rapid inflow of capital in opposition to or in fear of domestic political and economic conditions and policies—is one of the problems that capital controls are designed to control.Consider the following open economy. The real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by:C = 8 + 0.6(Y - T), I = G = T = 0.Imports/ exports are given by:Q = 0.4Y, X = 0.4Y*,where an asterisk denotes a foreign variable a. Suppose that the domestic country takes foreign income Y* as given. The equilibrium output in the domestic economy is? b. Following a), if the domestic government increases spending by 6 units (i.e., G increases from 0 to 6), the equilibrium output in the domestic country will increase by ____. and the trade balance will ________ (increase/decrease) by _____. c. Assume the foreign economy has the same equations as the domestic economy. Both governments consider the impact of the other country on the domestic economy. If G=0, then the equilibrium output in both countries is ______ and the trade balance is ______. d. Following c), if the domestic government increases spending by 6 units as in b) and G=0…In the open-economy macroeconomic model, the key determinant of net capital outflow is the A. real interest rate. When the real interest rate rises, net capital outflow rises. B. real interest rate. When the real interest rate rises, net capital outflow falls. C. real exchange rate. When the real exchange rate rises, net capital outflow rises. D. real exchange rate. When the real exchange rate rises, net capital outflow falls.
- Consider the following open economy. The real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by:C = 8 + 0.6(Y - T), I = G = T = 0.Imports/ exports are given by:Q = 0.4Y, X = 0.4Y*,where an asterisk denotes a foreign variable a. If the domestic government increases spending by 6 units (i.e., G increases from 0 to 6), the equilibrium output in the domestic country will increase by ____. and the trade balance will ________ (increase/decrease) by _____. b. Assume the foreign economy has the same equations as the domestic economy. Both governments consider the impact of the other country on the domestic economy. If the domestic government increases spending by 6 units as in b) and G=0 in the foreign country, the equilibrium output in the domestic country increases by _______ units, and the trade balance in equilibrium is _____. c. Please compare answer a) and b) regarding the equilibrium output and explain the difference.Assuming there is an increase in private saving in a small open economy, describe the potential impact on net exports and the exchange rate. a.Net exports decrease and the real exchange rate appreciates b.Net exports increase and the real exchange rate depreciates c.Net exports increase and the real exchange rate appreciates d.Net exports decrease and the real exchange rate depreciatesThe government of the republic of Zambia decides to introduce a 100% ad valorem tariff on all imports. Graphically illustrate the effects of such a policy measure on the exchange rate, assuming that Zambia is a small open economy.
