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.

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.

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter8: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 7QP

See similar textbooks

Similar questions

Which of the following is not true about the LM curve in the Mundell-Fleming Model? a.it is vertical because the exchange rate is not in the LM* model b.it is positively related to the domestic interest rate c.it determines aggregate income regardless of the exchange rate d.it describes the equilibrium in the money market
The following question relates only to the equilibrium in the goods market IN A CLOSED ECONOMY and asks you to carry out a graphical analysis using both the Keynesian cross diagram together with the IS-MP diagram. >>>) Consider an open economy with a floating exchange rate regime. After a terrorist attack in the country, consumer confidence and business confidence have taken a serious hit, negatively impacting consumption and investment in the economy. To prevent the economy from suffering too badly, the central bank wants to intervene in such a way as to keep output at the same level as before the terrorist attacks. Within the IS-MP framework, explain and illustrate graphically the impact of the drop in consumer and business confidence and subsequent central bank intervention on equilibrium output, the real interest rate, net cash outflow, the trade balance and the country’s real exchange rate. Is it possible for you to determine the overall impact on consumption and…
The Mundell-Fleming model provides a hypothesis that the movement of nominal value (e) can affect fluctuations in output (Y). If it is defined as the ratio between foreign and domestic currencies, then answer the following questions:a) Explain the conditions so that the condition r = r* can be met!b) Derive the IS-LM curve for the Mundell-Fleming Model and its difference with the IS-LM curve for a closed economy!c) If a country adopts a fixed exchange rate system, how will it affect the independence of domestic monetary policy? Complete your argument with the IS-LM curve.
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.
It is possible to assert that the exchange rate is endogenous in the equation system nx = c1 + c2 y + c2 ex + u, where nx is net exports, y is gross domestic product, and ex is real exchange rate. Defend this assertion.
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.
Assume floating exchange rates, and that after the election, the new government follows a new policy and constructs roads, bridges, and five new airports. Explain and illustrate the impact of such policy on total output, interest rates, and exchange rates under the Mundell-Flemming model
Suppose the government releases information that causes people to expect the purchasing power of the local currency in the future will be less than they previously had expected. What will happen to the FX rate today? Select one: a.The currency will weaken. b.There will be no immediate change. c.The currency will strengthen. d.It is hard to forecast. Which of the following statements is/are true with regard to the movements in cross exchange rates? Choose all that apply. Select one or more: a.A change in the equilibrium cross exchange rate over time is due to the same types of forces that affect the demand and supply conditions between two currencies. b .If currencies A and B move in the same direction by the same degree against the dollar, currency A will also move in the same direction by the same degree against currency B. c.When currency A appreciates against the dollar by a greater degree than currency B, then currency A depreciates against currency B. d.If currency A appreciates…
exports and the IS curve: Consider the way in which net exports dependon the real exchange rate. Does the dependence of net exports on the realexchange rate make the IS curve steeper or fatter?
Whether 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.
The transmission mechanism for contractionary monetary policy implies that: a. Australian financial assets will become more attractive to the rest of the world, increasing the supply for Australian dollars in the exchange rate market, which leads to a depreciation of its exchange rate that in turn increases net exports. b. Australian financial assets will become more attractive to the rest of the world, increasing the demand for Australian dollars in the exchange rate market, which leads to an appreciation of its exchange rate that in turn decreases net exports. c. Australian financial assets will become more attractive to the rest of the world, decreasing the supply of Australian dollars in the exchange rate market, which leads to an appreciation of its exchange rate that in turn decreases net exports. d. Australian financial assets will become more attractive to the rest of the world, increasing the demand for Australian dollars in the exchange rate market, which…
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.