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- Explain these statements a) “In a flexible exchange rate system with perfect capital mobility, expansionary fiscal policy will always crowd out net exports.”d) “A central bank may not be able to successfully stabilize the economy since monetary policy has long and variable outside lags. But if the central bank knew the exact length of the outside lag, active monetary stabilization policy would always be successful.a) Discuss the effect of a sterilized central bank purchase of foreign assets under the imperfect asset substitutability assumption. (B). Explain why the DD-AA model yields the conclusion that in an economy in which the exchange rate is fixed, the fiscal policy is more effective but monetary policy is less effective than under flexible exchange rates.on a flexible exchange system using central bank's resources, show the effects of an expansionary fiscal policy by a graph and explain it. (you can assume whatever you want on capital mobility) thanks!
- Suppose that in a small open economy exchange rates are fixed. The AD and AS curves are given by:AD:Y =110+2G−T−10π AS:Y =105+10(π−π ̄)where Y is output, G is government spending, T is taxes, π is inflation and π ̄ is core inflation. Why does aggregate demand not depend on monetary policy? What is the natural rate of output? Suppose we are at the long run equilibrium. Suppose also that the government is running a balanced budget and world inflation is equal to 1. What are the values of G, T, Y, π and π ̄? If the government sets both G and T to 10, what will happen to Y and π in the short run?Within the framework of the Mundell Flemming Model, a) In an economy where there is partial movement of capital, the uncertainty increases, and the interest on external debt rises in the free exchange rate regime. In this case, in which direction is the demand-side balance of the economy moving? (The LM curve is steeper than the BOP curve). How do the exchange rate, money supply, national income, and interest change? b) How does the Central Bank's devaluation affect the demand-side balance of the economy under the fixed exchange rate regime in an economy where capital is fully mobile? How do exchange rates, money supply, national income, and interest rates change?Assume a system of flexible exchange rates and perfect capital mobility as well as equilibrium in the goods market, the money market and the balance of payments. Also assume that there is unemployment. Explain with the aid of a diagram, using the IS/LM/BP analysis, how a small nation can reach the full employment level of income with equilibrium in its balance of payments by applying the appropriate fiscal policy without any monetary policy.
- How can the long-term bond market help reduce thetime-inconsistency problem for monetary policy? Canthe foreign exchange market also perform this role?what are two reasons Why is the statstic for fiscal deficits are so closely monitired in small fixed exchange rate economies?Decide if the following statements are true, false or if the veracity is uncertain. Explain your answers. a. An economy subject to shocks should adopt a floating exchange rate regime to stabilize the output level b. With exchange rate depreciation, the domestic interest rates can be maintained lower than the international, given that with foreign currency a foreign investor can purchase more domestic currency. c. In a fixed exchange rate regime, a country can follow an independent monetary policy by using sterilized interventions on the foreign exchange market.
- Question 1It is often said by economists that fixed exchange rates make monetary policy totally ineffective as a stabilization tool. Explain why you agree or disagree with this statement. Assume an open economy. Keynes favoured fiscal policy over monetary policy to stabilize the economy and fixed exchange rates over flexible exchange rates. Is it consistent or inconsistent to pair fiscal policy with fixed exchange rates and monetary policy with flexible exchange rates? Explain why.Consider the following: C = 400 + 0.5·(Y – T) I = 80 + 0.1·Y – 1000·(i – πe + x)NX = 0.01·Y*– 0.1·Y – 4·(E – 100) G = 600 T = 480 Y* = 20,000 The central bank anchored inflation expectations at target inflation rate of π̅= 0.02. Household borrowing rates and businesses include a 4% risk premium over policy rate (i) so: x - 0.04. The central bank has set policy rate equal to 2% (, ī = 0.02). The Exchange rate (E) is 100. Expected future exchange rate is also 100. Then assume the governent cuts tax level from T=480 to T′ = 400: a) Find the short run equilibrium level of output and trade balance? a) If the economy was at potential before, what effects will the tax cut form 480 to 400 have on investments and on trade balance in the medium run?QUESTION 4: PLACE TRUE OR FALSE OR UNCERTAIN (T/F/U) According to the classical macroeconomic model, expansionary fiscal policy has an inflationary effect. Assuming that you have free capital mobility and fixed exchange rate policy, then fiscal policy has a positive effect on output Expansionary fiscal policy always has a depreciating effect on the domestic exchange rate. According to the relative income hypothesis, the savings rate is a non-linear function of the ratio of current to previous peak income. In the IS-LM-BOP model, macroeconomic adjustments occur through changes in money supply if the country adopts a fixed exchange rate regime. According to the impossible trinity, a country that has a liberalized capital account and independent monetary policy will also achieve a stable exchange rate.