In the monetary small open-economy model, suppose that money supply equals 100. The money demand function takes the form Md=P(0.5Y-400r). The foreign price level P* is 1. The equilibrium output Y is 200 and the world interest rate r* is 0.2. (a) Determine the equilibrium exchange rate. (b) If the country adopts a flexible exchange rate regime, what will be percentage change in the equilibrium exchange rate if money supply goes up by 10%?
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In the monetary small open-economy model, suppose that money supply equals 100. The money demand function takes the form Md=P(0.5Y-400r). The foreign price level P* is 1. The equilibrium output Y is 200 and the world interest rate r* is 0.2.
(a) Determine the equilibrium exchange rate.
(b) If the country adopts a flexible exchange rate regime, what will be percentage change in the equilibrium exchange rate if money supply goes up by 10%?
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- In the monetary small open-economy model, suppose that money supply equals 100. The money demand function takes the form Md=P(0.5Y-400r). The foreign price level P* is 1. The equilibrium output Y is 200 and the world interest rate r* is 0.2. (a) If foreign price rises by 50%, what will be the percentage change in the equilibrium exchange rate? In this case, we assume that money supply is fixed at 100.(b) If the country wishes to stabilize the exchange rate, what will be the new money supply if foreign price rises by 50%?In the monetary small open-economy model, suppose that money supply equals 100. The money demand function takes the form Md=P(0.5Y-400r). The foreign price level P* is 1. The equilibrium output Y is 200 and the world interest rate r* is 0.2. (a) Determine the equilibrium exchange rate. (b) If the country adopts a flexible exchange rate regime, what will be percentage change in the equilibrium exchange rate if money supply goes up by 10%? (c) If foreign price rises by 50%, what will be the percentage change in the equilibrium exchange rate? In this case, we assume that money supply is fixed at 100. (d) If the country wishes to stabilize the exchange rate, what will be the new money supply if foreign price rises by 50%?In general, currency crises are associated with severe falls in economic activity. However, a good part of the first- and second-generation currency crisis models does not explicitly model the factors that could explain the recession. Consider a small, open economy with a fixed exchange rate regime and in which investors depend both on the real interest rate, r, as well as a variable, θ, which can be interpreted as a variable associated with the risk of a currency crisis, according to the perception of the agents. Therefore, the investment function can be written as where g1 and g2 are constant positive parameters. For the sake of simplification, assume that variable θ possesses binary behavior, as following described: a. Explain why the perception of a currency crisis negatively affects investments. b. Based on what has been seen in this chapter, especially in what refers to the asset balance sheet currency mismatch of financial institutions, explain how a proxy…
- You are the chief economic adviser in a small open economy with a floating exchange rate system. Your boss, the president of the country, wishes to increase the level of output in the short run in order to win reelection. Do you recommend using monetary or fiscal policy? Expansionary or contractionary? Use the Mundell-Fleming model to illustrate graphically your proposed policy. State in words what happens to real output, the nominal exchange rate, the level of consumption, the level of investment, and the net exports,In the monetary small open-economy model, suppose that money supply equals 100. The money demand function takes the form Md = P • (0.5Y-400r) The foreign price level P* is 1. The equilibrium output Y is 100 and the world interest rate r* is 0.1. a. Determine the nominal exchange rate and the price level. b,Under a fixed exchange rate regime, if output goes up from 100 to 120, what will be the new equilibrium money supply and the price level?c.Under a flexible exchange rate regime, under the same shock in Part b), if the money supply is still 100, what will be the new equilibrium nominal exchange rate and the price level? d.If the goal of the government is to stabilize the price level, would it be preferable to have a fixed exchange rate or a flexible exchange rate regime when there is a change in output?For the above condition to hold, perfe mobility must be assumed and the domestic interest rate must be the foreign interest rate. equal to higher than lower than 2. When a country pegs its exchange rate, an increase in government spending A. the foreign rate. B. the interest rate. C. output. D. all of the above (G) increases: all of the above 3. In an economy with fixed exchange rates that is performing near full output, ______could become an issue that monetary policy would otherwise be able to address in an economy with flexible exchange rates by _____
- 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; increaseAssume an open economy with a fixed exchange rate and a credible inflation target. Also assume that the economy is in an expansionary gap, with an inflation that is lower than the target level. Thus, in the short-run, ______ could be used to obtain a quicker stabilization of the economy back to potential output. In the long-run, self-correction is ________ to reach the inflation target. Select one alternative: fiscal policy; preferable monetary policy; preferable None of the alternative solutions provided monetary policy; not preferable fiscal policy; not preferable Climate change is a phenomenon with _______. Select one alternative: None of the alternative solutions provided diminishing marginal returns increasing marginal returns positive externalities negative externalitiesThe equilibrium interest rate determined in the IS-LM model will give rise to an implied exchange rate in an open economy. Which one of the following statements regarding this relationship is INCORRECT? (a) The interest parity condition implies that there is a positive relationship between the domestic interest rate and the exchange rate; (b) An increase in the interest rate will cause an upward movement along the IS curve and the exchange rate will appreciate; (c) A decrease in the interest rate will result in an upward shift of the LM curve and the exchange rate will appreciate; (d) A decrease in the interest rate will result in a downward shift of the LM curve and the exchange rate will depreciate.
- Exchange Rate Regime a. Do you agree with the following statements? Explain your responses briefly by using relevant open economy models/equations. i) In the Short Run, a flexible exchange rate regime seems to be less attractive than a fixed exchange rate regime ii) In the Medium Run, the economy with a flexible exchange rate regime will generate higher levels of output compared to when it operates under fixed exchange rate regime b. Consider an open economy with a flexible exchange rate. Suppose there is a 10% increase in the money stock and assume that it increases the price level by the same percentage in the medium run. If the real exchange rate and the foreign price level are unchanged in the medium run, what must happen to the nominal exchange rate in the medium run?Under a flexible exchange rate regime, if a foreign trading partner goes into recession a. the nominal exchange rate falls and the RER falls, increasing demand for tradeable goods, reducing the balance of trade and reducing demand for domestic goods and services b. the nominal exchange rate rises, which increases net exports and improves the trade balance c.the nominal exchange rate rises and the RER rises, improving the balance of trade and boosting demand for domestic goods and services d. None of the available answers are relevantWhat happens when international financial capital is completely free to move in and out of countries in search of investment or speculation opportunities? a. Countries lose autonomy to affect GDP through monetary policy under a free-floating exchange rate policy. b. None of the alternatives is correct. c. Countries lose autonomy to affect GDP through fiscal policy under a fixed exchange rate policy. d. Countries lose autonomy to affect GDP through fiscal or monetary policies regardless of the exchange rate policy. e. Countries retain autonomy to affect GDP through fiscal or monetary policies regardless of the exchange rate policy.