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- How would a contractionary monetary policy affect the exchange rate, net exports, aggregate demand, and aggregate supply?What would be the effect of an increase in U.S. netexports on the aggregate demand curve? Would anincrease in net exports affect the monetary policy curve?ExplainUse the information in the table below to calculate the change in the long-run Arakko ignis / Krakoan xcoin exchange rate (Ei/x). Specifically, does the Arakko ignis appreciate or depreciate, and by what percentage? Country - Change in Money Supply (µ) - Growth rate (g) Arakko 30% –4% Krakoa 10% 6%
- Suppose the Federal Reserve wants to fix the U.S. exchange rate with the yen at $0.008 per yen. If the equilibrium market exchange rate were significantly lower at $0.007 per yen, what would the Fed need to do to maintain the fixed rate of $0.008 per yen? What would be the effect of these actions on the money supply in the U.S.? Explain.If the Fed raises the federal funds rate so that the exchange rate rises, then imports ________ and exports ________. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decreaseWhy is it that in a pure, flexible exchange rate system,the foreign exchange market has no direct effect onthe money supply? Does this mean that the foreignexchange market has no effect on monetary policy?
- Federal Reserve & Open Market Operations If the Fed shifts to a more restrictive monetary policy, and it utilizes the open market operations tool, describe what will happen to each of the following: 4. the exchange rate value of the dollar-Why do interest rates and exchange rates move in the same direction in theshort run?What are the key advantages of exchange-rate targetingas a monetary policy strategy?
- In 1992, several European countries had their individual currencies pegged to the ECU (a pre-cursor to the euro) in anticipation of forming a common currency area. In practice, this meant that countries were pegged to the German deutschmark (DM). This question considers how two different countries responded to the European Exchange Rate Mechanism (ERM) Crisis. For the following situations, you need only consider short-run effects. Also, treat Germany as the foreign country. (a) Following the economic consequences of German reunification in 1990, the Bundesbank (Germany’s central bank) raises its interest rate. On September 14, 1992, Great Britain decided to float the British pound (£) against the DM. Using the foreign exchange market, the money market, and treating Britain as the home country, graphically illustrate the effects of Germany increasing its interest rate on Great Britain. (b) After Britain abandoned the ERM (e.g., allowed its currency to float against the DM), investors…What is the foreign exchange intervention and how its affects the money supply (Give an example with the graph)Explain how the contractionary monetary policy in the U.S. adds to the global recession.
