Explain with the aid of a model graph, describe the effect of changes in domestic and foreign Interest rates on the equilibrium exchange rate D/S curve
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- Give a detailed answer to the theoretical question:Display graphically and explain an exchange rate overshootingIn the Mundell-Fleming model with a floating exchange rate, what happens to the following variables when there is a decrease in business confidence about the future so firms invest less? Include a graph. a. Aggregate Income b. Exchange Rate: c. Trade Balance:Under a floating exchange rate system, use the Mundell-Fleming model to predict with the aid of a graph, what would happen to the following variables when the money supply is reduced. Exchange Rate: (increase, decrease, or unchanged?) Trade Balance: (increase, decrease, or unchanged?) Aggregate Income: (increase, decrease, or unchanged?) Please provide a graph to support your answer.
- Define the term “Exchange rate volatilityWhether this is true, false or uncertain? Why? Use graphs if possible. The difference between the slopes of the IS and RX curves depends only on the sensitivity of net exports to the real exchange rate.How will you form exchange rate forecasts based on the covered interest parity and purchasing power parity, respectively? Explain your answer with illustrative examples.
- Macroeconomics. Explain how the exchange rate adjusts to a temporary decrease in the foreign interest rate, R*, holding output constantwhich of the following is an assumption of the monetary approach to the exchange rates? A - PPP Holds B - UIRP holds C - prices are flexible D - All of the above E - Only A and C of the aboveExplain how the flexible exchange rate may be use to correct disequilibrium within an economy.
- In a large open economy, the IS curve has been given by Sd(r)-Id(r)=NX(e), where e is the real exchange rate that is positively related to the real interest rate r. Can you illustrate why the IS curve is downward sloping? That is, as Y increases, the real interest rate r is lower in equilibrium.Suppose for Home: Ms=2169, Md/P=5767-99865*R, P=2 Suppose for Foreign:Ms=2655, Md/P=7099-98140*R, P=1 Suppose Absolute PPP holds. What is the expected exchange rate Ee?Consider the classical open-economy macroeconomic model. Explain how a Federal Reserve action such as buying bonds impacts an economy that is operating under the following assumptions: exchange rates are flexible but wages and prices are sticky, there is perfect capital mobility and the economy is already at full employment. Be clear how it impacts GDP, unemployment, inflation, and the exchange rate. Provide the necessary equations to support your answer and diagrams.