Using relevant Classical Theories, explain how this would affect her net capital outflow, real exchange rate and trade deficit in the long run.
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Suppose Country A is a small open economy with a
concern of plausible supply chain issues, business firms in Country A tend to
increase their level of inventory.
Using relevant Classical Theories, explain how this would affect her net
capital outflow, real exchange rate and trade deficit in the long run.
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Solved in 4 steps with 3 images
- what are two reasons Why is the statstic for fiscal deficits are so closely monitired in small fixed exchange rate economies?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.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.
- SECTION 4: TRUE OR FALSE OR UNCERTAIN 25. According to the classical macroeconomic model, expansionary fiscal policy has an inflationary effect. 26. Assuming that you have free capital mobility and fixed exchange rate policy, then fiscal policy has a positive effect on output 27. Expansionary fiscal policy always has a depreciating effect on the domestic exchange rate. 28. According to the relative income hypothesis, the savings rate is a non-linear function of the ratio of current to previous peak income. 29. In the IS-LM-BOP model, macroeconomic adjustments occur through changes in money supply if the country adopts a fixed exchange rate regime. 30. According to the impossible trinity, a country that has a liberalized capital account and independent monetary policy will also achieve a stable exchange rate.In your macroeconomic lectures you are often told that exchange rates and interest ratesare important for macroeconomic decision-making.a. How does an increase in Japan’s government budget deficit affect each of thefollowing?a. "Under fixed exchange rates, monetary policy should be used to attain external balance and fiscal policy for internal balance; otherwise the economy never reaches balance." Critically discuss with reference to the policy mix diagram and the principle of effective market classification. b. Distinguish between expenditure-changing and expenditure switching policies and show how the Swan Diagram is constructed in order to analyse the effects of these policies on the macroeconomy. What combination of policies does your analysis suggest when the economy is initially in a recession with a balance of payments deficit?
- 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.Identify the statement as True, False, or Uncertain, and explain your reasoning: a) In a 2-bloc world economy with flexible exchange rates, the same inflation shock affects both blocs. Tighter monetary policy in each bloc produces exchange rate appreciation. b) Assume that workers supply effort based on their expected real consumption wage and consume a basket with a non-negligible component of imported goods and services. The government in an open economy implements a contractionary fiscal policy (from an initial medium-run equilibrium) motivated, for example, by its desire to reduce national debt. This leads to lower real wages and higher unemployment in equilibrium. Hint: you may want to compare this with the case in which the initial two assumptions do not hold. c) 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…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?
- Graphically illustrate the traditional view of the short-run impacts of a debt-financed taxcut on:a. interest rates and output in a closed economy in the short run, using the IS–LM model.b. exchange rates and output in a small open economy with a flexible exchange rate inshort run, using the Mundell–Fleming model.QUESTION 10Suppose there are two countries that are identical in every way with the following exception. Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible exchange rate regime. Suppose government spending in both countries rises by the same amount. Given this information, we know that: the change in output in A will be greater than in B. the change in output in B will be greater than in A. the change in output will be the same in both countries. the relative output effects are ambiguous.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.