Меxico USA Good Good Meat Textiles Cost Price Meat Textiles Churros Electronics Energy МP9,000 MP8,000 $500 $400 MP4,000 $160 Donuts Electronics MP7,000 MP12,000 $300 Energy $600 2. Using the general monetary model of long-run exchange-rate determination, explain the effect and timing of (a) a domestic price increase, and (b) expectation of a domestic price increase on Home's exchange rate. (Mexico as Home)
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- The nominal money supply is growing by 5 percent annually in the United States and 10 percent annually in Kenya, while real GDP is rising by 2.5 percent annually in the United States and 5.5 percent annually in Kenya. Using the simple monetary model of exchange-rate determination, please estimate the percentage change, if any, needed in the dollar-shilling (Ksh) exchange rate for it to reach a long-run equilibrium (assuming that the currencies were in equilibrium at the outset). Be sure to include the relevant equation in your answer, and indicate whether the dollar will appreciate, depreciate, or hold its value versus the shilling. (Hint: the percentage is a round number.) Please use the uncovered interest parity approximation to answer the following question: (a) If the return on euro deposits (i€) is 1%, the expected dollar-euro exchange rate (Ee$/€) is 1.30, and dollar-euro spot rate (E$/€) falls to 1.25, what is the new equilibrium return on dollar deposits (i$)? (Hint 1:…Consider the AA-DD model with flexible exchange rates. Assume the economy is initiallyat full employment.a) Suppose a temporary shock to the money demand pushes the economy intorecession. Describe one policy intervention that takes the economy back to its preshock equilibrium position.Use the information in the table below to calculate the change in the long-run Arakko ignis / Krakoan xcoin exchange rate (Ei/x). Specifically, does the Arakko ignis appreciate or depreciate, and by what percentage? Country - Change in Money Supply (µ) - Growth rate (g) Arakko 30% –4% Krakoa 10% 6%
- Assume that the expected future exchange rate is unchanged and that the central bank holds the real money supply fixed. Draw an IS-LM-IP diagram to show the effect of the drop in consumer confidence. Label all axes and curves and mark all the values and equilibrium points appropriately.Part 4 5 6 Answer all questions from this section. For each question, identify the statement as True,False, or Uncertain, and explain your reasoning A.1 Following the announcement that the amount of QE intervention by the central bankwill be reduced going forward (also known as Quantitative Tightening), according to theUIP condition, an immediate appreciation of home’s nominal exchange rate would beobserved. A.2 The difference between the slopes of the IS and RX curves depends only on the sensitivityof net exports to the real exchange rate. A.3 Consider a temporary positive inflation shock in a flexible exchange rate regime (with aninflation targeting central bank) and in a fixed exchange rate regime (where there is nopolicy intervention). Assume that both economies converge to a medium run equilibrium.Following the shock, inflation converges to its equilibrium value from above in both cases.A.4 The central bank of a common currency area should not respond to a shock specific toone…Answer all questions from this section. For each question, identify the statement as True,False, or Uncertain, and explain your reasoning A.1 Following the announcement that the amount of QE intervention by the central bankwill be reduced going forward (also known as Quantitative Tightening), according to theUIP condition, an immediate appreciation of home’s nominal exchange rate would beobserved. A.2 The difference between the slopes of the IS and RX curves depends only on the sensitivityof net exports to the real exchange rate. A.3 Consider a temporary positive inflation shock in a flexible exchange rate regime (with aninflation targeting central bank) and in a fixed exchange rate regime (where there is nopolicy intervention). Assume that both economies converge to a medium run equilibrium.Following the shock, inflation converges to its equilibrium value from above in both cases.A.4 The central bank of a common currency area should not respond to a shock specific toone member. A.5…
- Hi. How do you draw the Mundell-Fleming model with a fixed exchange rate and a restrictive monetary policy? Does the IS curve shift to the left whilst the LM curve remains the same.Consider an economy with the followingC = 200 + 0.4(Y − T)I = 300 − 5000rT = 0, G = 0L(rw, Y ) = 250 + 0.06Y − 300rP = 1e = 1rw = 0.09 e is the fixed exchange rate a. Derive the IS curve and compute equilibrium output and interest rate b. Derive the LM curve and compute equilibrium money supply c. Suppose the Central Bank revalues exchange rate from 1 to 0.85. Recalculate theequilibrium output, interest rate, and money supply d. Suppose the Central Bank devaluates the exchange rate from 1 to 1.3. Recalculate theequilibrium output, interest rate, and money supply.Distinguish between the short run and long run determinants of exchange rate volatility. In your assessment show how the exchange rate movements can influence the Interest Parity Condition. Policy makers can respond to shocks in two possible ways i.e. no policy response and policy stabilisation of economic activity and inflation. -Use the AS- AD framework to demonstrate how aggregate output and inflation would perform following an aggregate demand shock accompanied by monetary policy stabilisation measures -Show how the outputs above would differ in case of a permanent shock on supply using the AD-AS framework.
- 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.In November, the UK central bank voted to leave its policy (bank) rate uncahged at a historic low of 0.1% which surprised investors who expceted an increase. The British Pound fell sharply against the US Dollar (more than 1%) and the Euro (more than 0.5%). The yield on 2 year gilts fell by 21 basis points.a) Why did the pound depreciate when the English Central Bank surprised the market by not hiking its policy rates as expected b) why did the yield cureve steppen after the Bank's decision not to raise rates? Are markets optimistic or pessimistic about the economy's future?identify the statement as True, False, or Uncertain, and explain your reasoning in detail. 1)Following the announcement that the amount of QE intervention by the central bank will be reduced going forward (also known as Quantitative Tightening), according to the UIP condition, an immediate appreciation of home’s nominal exchange rate would be observed. 2) The difference between the slopes of the IS and RX curves depends only on the sensitivity of net exports to the real exchange rate. 3) Consider a temporary positive inflation shock in a flexible exchange rate regime (with an inflation targeting central bank) and in a fixed exchange rate regime (where there is no policy intervention). Assume that both economies converge to a medium run equilibrium. Following the shock, inflation converges to its equilibrium value from above in both cases. 4)The central bank of a common currency area should not respond to a shock specific to one member. 5)Assume that workers supply effort…