Question 2 Assuming that, due to an improved political outlook in the United States, some economists are arguing that there will be a massive outflow of capital from Heartland to the United States. Assuming that the currency of Heartland is heartmarks. a) Explain, with the help of appropriate diagrams, how such a capital flow will affect the real exchange rate and output in Heartland? b) Suppose the Heartland Government has a fixed exchange rate regime in place, maintained by appropriately manipulating the domestic interest rate. Given the improved political outlook in the United States and the threat of capital flowing back to the United States, how should the Heartland Government adjust domestic interest rates to maintain stability in the value of the domestic currency? Assume that the flow of capital out of Heartland is partially driven by worsening political uncertainty in Heartland. Explain, using appropriate diagrams. c) Given your answer in part B, what should the monetary policy stance in the U.S. be, if the objective is to boost output and employment in the U.S. in the short run? Explain how

Question 2 Assuming that, due to an improved political outlook in the United States, some economists are arguing that there will be a massive outflow of capital from Heartland to the United States. Assuming that the currency of Heartland is heartmarks. a) Explain, with the help of appropriate diagrams, how such a capital flow will affect the real exchange rate and output in Heartland? b) Suppose the Heartland Government has a fixed exchange rate regime in place, maintained by appropriately manipulating the domestic interest rate. Given the improved political outlook in the United States and the threat of capital flowing back to the United States, how should the Heartland Government adjust domestic interest rates to maintain stability in the value of the domestic currency? Assume that the flow of capital out of Heartland is partially driven by worsening political uncertainty in Heartland. Explain, using appropriate diagrams. c) Given your answer in part B, what should the monetary policy stance in the U.S. be, if the objective is to boost output and employment in the U.S. in the short run? Explain how

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter14: A Macroeconomic Theory Of The Open Economy

Section: Chapter Questions

Problem 7PA

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