Show the effects of a fiscal expansion in an open economy with a flexible exchange rate. Show the effects on both the money market as well as what happens to the aggregate demand curve. Make sure to include the changes in interest rate, money demand, and exchange rate.
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- 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.Now suppose that U.S income rises. As a result, Canada’s exports to US increase. What happens to the position of AD curve in the output market in Canada (use only the aggregate demand curve on the graph, not AS) if Bank of Canada allows the exchange rate to be flexible. Clearly explain what happens in the foreign exchange market and money market as well.what are two reasons Why is the statstic for fiscal deficits are so closely monitired in small fixed exchange rate economies?
- Suppose Country A is a small open economy with a trade deficit. With a risingconcern of plausible supply chain issues, business firms in Country A tend toincrease their level of inventory. Using relevant Classical Theories, explain how this would affect her netcapital outflow, real exchange rate and trade deficit in the long run.D4) FinanceImagine that the economy is at a point that is below both AA and DD, where both the output and asset markets are out of equilibrium. Which first action is TRUE? The exchange rate will first increase to a point on the AA schedule. The exchange rate will first move to a point on the DD schedule. The output will directly decrease. The output will directly increase. The economy will stay at this level in the short run.(a) There are two countries in the world, Australia and Japan. Suppose that the central bank of Australia lowers the real interest rate, while the central bank of Japan raises the real interest rate. In this case, the nominal exchange rate (Yen/Dollar) increases. Answer true or false. Please briefly explain your answer. (b) Argentina is an open economy. Suppose that Argentina fixes the value of their currency to US dollars. If Argentina experiences hyperinflation, it can stabilize inflation by using its monetary policy freely. Answer true or false. Please briefly explain your answer.
- Kindly note I need all answers It will gives you upvote QUESTION 13 For the following questions assume that the Fed is committed to price level stability. Initially, the exchange rate is 1.0. The US interest rate starts at 0.15 and the Fed increases the money supply by twenty percent (0.2) reducing the interest rate to 0.01. Assume that the economy completely adjusts after two years. Two years from now, the exchange rate is. 1.2 0.80 1.0 1.10 QUESTION 14 What is the change in the price level over the next two years 0.20 0.10 0.0 -0.10 QUESTION 15 Starting from today, what is the change in the interest rate over the next two years -0.10 0.00…Japanese monetary policy has been at the zero lower bound for more than a decade. The Bank of Japan recently announced an increase in its target rate of inflation from 1 percent to 2 percent. The evidence available so far suggests that this announcement has increased expected inflation. a. Show the effects of this development in an IS-MP diagram accounting for the zero lower bound. What are the effects on the real interest rate (r) and output (Y)? b. How would this development affect the real exchange rate and the net exports (NX)? c. The Bank of Japan also announced a program of quantitative easing where it will buy a large amount of long-term public and private debt. What is this program likely to do to long-term nominal interest rates? If investment depends on long term rates, how would you expect this part of the program to show up in the IS-MP diagram? What will it do to output?Q3-2 The IS/LM/BP analysis suggests that, under flexible exchange rates, Select one: a. monetary policy is less powerful for affecting national income than under fixed exchange rates. b. a country may have difficulty in staying on the LM curve. c. expansionary fiscal policy may, in theory, cause either depreciation or appreciation of the home currency. d. expansionary fiscal policy will always lead to a decline in national income.
- If the Japanese Yen appreciates relative to the U.S dollar, how will this impact U.S imports, exports, net exports, aggregate demand, the price level and the level of real GDP in the U.S? Will depreciation in the value of the US dollar relative to the Japanese Yen have any impact on SRAS? Explain your answer carefully.Use IS-LM model graphs and show the results of fiscal consolidation (reducing G) in the country with fixed exchange rate regime. Discuss the effects of fiscal consolidation on Y, exchange rate E, i, C, I. (Hint – read the textbook by O. Blanchard Chapter 18.6 Fiscal Policy under Fixed Exchange rates)Suppose country A’s goods becomes more popular with foreign consumers, and country B’s less so. How would this affect each country, assuming that they (a) have their own independent currency and (b) share a common currency? Use the Aggregate Demand and Aggregate Supply framework to explain your answer, and comment briefly on the desirability of currency union.
