Using the short-run model of FX, carefully explain the link between the budgetary crisis in Venezuela, driven by the decline in oil prices and the depreciation in the Venezuelan exchange rate. (Diagram required).
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- Suppose the government releases information that causes people to expect the purchasing power of the local currency in the future will be less than they previously had expected. What will happen to the FX rate today? Select one: a.The currency will weaken. b.There will be no immediate change. c.The currency will strengthen. d.It is hard to forecast. Which of the following statements is/are true with regard to the movements in cross exchange rates? Choose all that apply. Select one or more: a.A change in the equilibrium cross exchange rate over time is due to the same types of forces that affect the demand and supply conditions between two currencies. b .If currencies A and B move in the same direction by the same degree against the dollar, currency A will also move in the same direction by the same degree against currency B. c.When currency A appreciates against the dollar by a greater degree than currency B, then currency A depreciates against currency B. d.If currency A appreciates…Answer all parts 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 What is the change in the price level over the next two years 0.20 0.10 0.0 -0.10 Starting from today, what is the change in the interest rate over the next two years -0.10 0.00 0.14 0.10Consider the classical open-economy macroeconomic model. Explain how a Federal Reserve action such as buying bonds impacts an economy that is operating under the following assumptions: exchange rates are flexible but wages and prices are sticky, there is perfect capital mobility and the economy is already at full employment. Be clear how it impacts GDP, unemployment, inflation, and the exchange rate. Provide the necessary equations to support your answer and diagrams.
- Which of the following statements are correct? Global economic crisis in 2009 was caused by volatility of financial markets in Latin America. Global economic crisis in 2009 hit advanced economies more severely than developing countries. Financial crises are often unpredictable. The existence of a fixed exchange rate system is one of the conditions of Mundell Trilemma.Case Summary :Managing Foreign Currency Exposure at 3M The closing case explores the implications of changing currency values at 3M. With about 60 percent of its annual revenues coming from outside the United States, 3M is especially vulnerable to fluctuations in exchange rates. Indeed, 3M believes that adverse currency movements cost the company some $42 million in pretax profits in 2018, and $11 million in 2017. 3M uses various strategies to reduce its exchange rate risk including forward contracts and foreign currency debt. 1-a) If the dollar depreciates in value against most other countries over the next year, what will the impact be on 3M? 1-b) Should3M hedge against adverse movements on foreign exchange rates? How should it do this?Explain how permanent shifts in national real money demand functions affect real and nominal exchange rates in the long run.
- Which of the following is correct? a. A recession in other countries reduces U.S. net exports so that U.S. aggregate demand shifts left. b. An increase in the money supply causes the interest rate to decrease so that aggregate demand shifts left. c. An increase in stock prices reduces consumption spending so that aggregate demand shifts left. d. An increase in the price level causes the exchange rate to rise so that aggregate demand shifts left.Which of the following is not true about the LM curve in the Mundell-Fleming Model? a.it is vertical because the exchange rate is not in the LM* model b.it is positively related to the domestic interest rate c.it determines aggregate income regardless of the exchange rate d.it describes the equilibrium in the money marketWhich of the following is likely to occur for the United States, if the US dollar loses strength relative to the Japanese yen, ceteris paribus? A- Aggregate demand will decrease (shift left) B- Aggregate demand will increase (shift right) C- Aggregate supply will increase (shift right) D- Aggregate supply will decrease (shift left)
- The following question relates only to the equilibrium in the goods market IN A CLOSED ECONOMY and asks you to carry out a graphical analysis using both the Keynesian cross diagram together with the IS-MP diagram. >>>) Consider an open economy with a floating exchange rate regime. After a terrorist attack in the country, consumer confidence and business confidence have taken a serious hit, negatively impacting consumption and investment in the economy. To prevent the economy from suffering too badly, the central bank wants to intervene in such a way as to keep output at the same level as before the terrorist attacks. Within the IS-MP framework, explain and illustrate graphically the impact of the drop in consumer and business confidence and subsequent central bank intervention on equilibrium output, the real interest rate, net cash outflow, the trade balance and the country’s real exchange rate. Is it possible for you to determine the overall impact on consumption and…The rise of globalization is due to the many companies that have become multinational corporations for various reasons—for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well—for example, political risk and exchange rate risk. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following: An American investor is considering investing $1,000 in default-free 90-day Japanese bonds that promise a 4% annual nominal return. • The spot exchange rate is ¥101.12 per dollar. • The 90-day forward exchange rate is ¥100.25 per dollar. A. The investor’s annualized return on these bonds—if he or she can lock in the dollar return by selling the foreign currency in the forward market—will be ____…The rise of globalization is due to the many companies that have become multinational corporations for various reasons—for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well—for example, political risk and exchange rate risk. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following: Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$): Spot Exchange Rate One-Year Forward Exchange Rate Canadian dollar (U.S. dollar/Canadian dollar) 0.8932 0.9133 Which of the following statements is implied by interest rate parity theory? A product bought in one country should have the same price in other countries,…