Discuss why the devaluation of domestic currency improves net exports in the extended version of the DD-AA model. Use a diagram in support of your answer.
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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, with the aid of the IS-LM model for a closed economy, the impact of an expansionary fiscal and monetary policy on the interest rate and the level of output.Imports and short-run output: In addition to depending on the exchange rate (and therefore on the interest rate), imports may depend on short-run output: when the economy is booming, consumers tend to demand more foreign goods. To incorporate this result into our short-run model, suppose the new net exports equation is Derive the IS curve with this new equation, and explain how it differs from the standard IS curve in the short-run model.
- Would each of the following transactions be included in net exports or net capital outflow? Be sure to say whether it would represent an increase or a decrease in that variable. A) A Malaysian buys a Sony TV. B) A Malaysian buys a share of Sony stock. C) The Japan pension fund buys a bond from the Malaysian treasury. D) A Japanese buys some durians from a Malaysian farmer.Graphically illustrate the traditional view of the short-run impacts of a debt-financed taxcut on:a. interest rates and output in a closed economy in the short run, using the IS–LM model.b. exchange rates and output in a small open economy with a flexible exchange rate inshort run, using the Mundell–Fleming model.Studies indicate that net exports and net capital outflows tend to be equal. 1. Explain why net exports and net capital outflows always tend to be equal. 2. Explain how a change in interest rates can lead to changes in net exports?
- Define the term “Exchange rate volatilityThe short run sequence of events following an unanticipated shift to a more expansionary monetary policy would be lower interest rates followed by dollar a. Depreciation, and an increase in net exports b. Appreciation, and a decrease in net exports c. Appreciation, and an increase in net exportsHow do fluctuating exchange rates benefit MNCs and how do they affect them negatively? Give an example of both.
- Consider an OPEN ECONOMY with a floating exchange rate regime. In the aftermath of recent elections won by the country’s socialist party, consumer confidence and consumption has increased dramatically. Within the IS-MP framework for an open economy, explain and illustrate graphically what the effect is of the increase in overall consumption on equilibrium output, the real interest rate, net cash outflow, the trade balance and the country’s real exchange rate.What gap would be created on an AS-AD model if the US dollar became weaker against other currencies?The Federal Open Market Committee of the Federal Reserve (the Fed) announced a rate hike of half a percentage point after its two-day meeting on May 4, 2022, raising the target range for the federal funds rate to 0.75-1.0%. Using the IS-LM-IP model, graphically illustrate and explain what HKMA must do to maintain the pegged exchange rate. Also discuss what effect this will have on domestic output and net exports. In your graphs, clearly label all curves and equilibria.