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The dollar-euro exchange rates are freely determined in foreign exchange market. Suppose that the Federal Reserve is expected to lower nominal interest rate next month. Use the IS-LM-FX model to illustrate the effects of such expectations on the following variables today: output (Y), nominal interest rate (i), exchange rate (E), investment (I) and trade balance
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- Exercise 3 For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. Note: Assume the government responds by using monetary policy to stabilize output, unlike Exercise 2, and assume the exchange rate is floating. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. For your graphical illustration, use A to denote initial equilibrium, B for the equilibrium in Exercise 2, and C for the equilibrium in Exercise 3. (a) Foreign output decreases. (b) Investors expect a depreciation of the Home currency. (c) The money supply increases.For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. Note: Assume the government responds by using monetary policy to stabilize output and assume the exchange rate is floating. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. a. Foreign output decreases. b. Investors expect a depreciation of the home currency. c. The money supply increases. d. Government spending increases. Please illustruate the IS-LM model and explain in detail. I want to understand for the upcomming testUse the money market diagram and the IS-LM-FX model to show graphically the effects of a decrease in money demand on the output, interest rate, exchange rate, consumption, investment, and trade balance. Assume a floating exchange rate regime.
- Macroeconomics. Explain how the exchange rate adjusts to a temporary decrease in the foreign interest rate, R*, holding output constantIt 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.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,
- How will the following event affect variables 1 through 3 in the foreign exchange market under a flexible exchange rate system; other things unchanged. Event: The U.S. Central Bank (the Fed) starts buying Chinese currency using dollar reserves: Variable 1: Supply of dollar in the foreign exchange market ___(increase, decrease, unaffected: briefly explain why). Variable 2: Value of dollar in the foreign exchange market unaffected: briefly explain why). Variable 3: American goods exported to China unaffected: briefly explain why). (appreciate, depreciate, (increae, decrease,Assume that Canada and the United States frequently trade with each other. Under the freely floating exchange rate system, low inflation in the U.S. will place ____ pressure on Canadian dollars (versus U.S. dollars), ____ the amount of Canadian dollars available for sale, and result in ____ inflation in Canada. a) upward; reduce; unchanged b) upward; increase; lower c) downward; reduce; lower d) downward; increase; unchanged e) None of the aboveUsing the model that we have developed, show what would happen with a new equilibrium domestic price level and real output if the Central Bank increases the policy rate. 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?
- Consider a positive country-specific aggregate demand shock. For a member country of a common currency area, the real exchange rate channel of adjustment to this shock is stabilizing. (Assume there is no policy response to the shock.) Draw a diagram depicting the adjustment. Also use equations.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?Open Economy in the Short Run and The Medium Run Suppose the United States (US) economy is experiencing a recession or a decrease in its level of output Y*. To tackle the problem, the US central bank (The Fed) is to decrease its policy rate (i*). By using ISLM-UIP (uncovered interest parity) framework, explain in words and graphically the effect of the decrease in Y* and i* on domestic output (Y) and exchange rate (E) if the Bank Indonesia does not change the domestic interest rate (i)!
