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- Assuming a fixed exchange rate policy, discuss the effectiveness of contractionary fiscal policy designed to decrease output.What is the effect of a fiscal expansion on output and interest rates when exchange rates are fixed and capital is perfectly mobile?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 answer
- You are the economic advisor to the Government of Sweden, a country that is not a member of the European Union but trades quite a bit with EU countries and with whom there is a high degree of capital mobility. (a) Suppose that the members of the European Union enact a large tax cut financed by a large increase in their deficit. What should happen to exchange rates in Sweden? What should happen to Sweden’s trade balance? Show the effects using appropriately labeled graphs, including that of the foreign exchange market. (b) Suppose instead that the European Central bank increase the money supply. What should happen to exchange rates in Sweden? What should happen to Sweden’s trade balance? Show the effects using appropriately labeled graphs, including that of the foreign exchange market. (c) If you are very interested in keeping the Swedish exchange rate constant at the rate it was before the EU tax cut, what specific policy would you recommend to do this, i.e. to keep your currency from…Q3-19 The IS/LM/BP analysis suggests that, if the BP curve is flatter than the LM curve and the exchange rate is flexible, expansionary fiscal policy will lead to _______ of the country's currency.This will make the fiscal policy _______ effective in influencing national income than if the country had a fixed exchange rate. Select one: a. a depreciation / more b. a depreciation / less c. an appreciation / more d. an appreciation / lessHow does a fiscal expansion affect the real exchange rate and net exports?
- 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,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.Assume that in 2010, Country A had an exchange rate of 0.770.77 units of national currency (UNC) per U.S. dollar (USD). By 2015, Country A's budget deficit increased, and Country A decided to issue bonds to finance the deficit. As a result, the exchange rate changed by UNC0.06UNC0.06. Calculate the 2015 exchange rate.
- Using the model that we have developed, show what would happen with a new equilibrium domestic price level and real output if the government increases government spending that are fully financed by increase of taxes (change of government spending is equal to the increase of taxes). What will be the size of the AD curve shift? Keeping nominal exchange rate and foreign price level constant, what will happen with the real exchange rate, import and net export?Will exchange rates correct a balance-of-trade deficit? Consider the case of a balance-of-trade deficit in the United States, along with a floating exchange rate. During a balance-of-trade deficit, net financial_______(Inflows/outflows) may be enough to offset net international trade flows, preventing the US dollar from________(Strengthening/weakening) and preventing exchange rate changes from_________(correcting/exaggerating) the problem.Q3-2 The IS/LM/BP analysis suggests that, under flexible exchange rates, Select one: a. monetary policy is less powerful for affecting national income than under fixed exchange rates. b. a country may have difficulty in staying on the LM curve. c. expansionary fiscal policy may, in theory, cause either depreciation or appreciation of the home currency. d. expansionary fiscal policy will always lead to a decline in national income.