Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Chapter 13, Problem 1AP
To determine
Effect of protective measure on economy
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Using the model that we have developed, show what would happen with a new equilibrium domestic price level and real output if the government increases government spending that are fully financed by increase of taxes (change of government spending is equal to the increase of taxes). What will be the size of the AD curve shift? Keeping nominal exchange rate and foreign price level constant, what will happen with the real exchange rate, import and net export?
The Mundell-Fleming model provides a hypothesis that the movement of nominal value (e) can affect fluctuations in output (Y). If it is defined as the ratio between foreign and domestic currencies, then answer the following questions:a) Explain the conditions so that the condition r = r* can be met!b) Derive the IS-LM curve for the Mundell-Fleming Model and its difference with the IS-LM curve for a closed economy!c) If a country adopts a fixed exchange rate system, how will it affect the independence of domestic monetary policy? Complete your argument with the IS-LM curve.
Using the model that we have developed, show what would happen with a new equilibrium domestic price level and real output if the Central Bank increases the policy rate. What will be the size of the AD curve shift? Keeping nominal exchange rate and foreign price level constant, what will happen with the real exchange rate, import and net export?
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- 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 marketarrow_forwardConsider an OPEN ECONOMY with a floating exchange rate regime. In the aftermath of recent elections won by the country’s socialist party, consumer confidence and consumption has increased dramatically. Within the IS-MP framework for an open economy, explain and illustrate graphically what the effect is of the increase in overall consumption on equilibrium output, the real interest rate, net cash outflow, the trade balance and the country’s real exchange rate.arrow_forwardWithin 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?arrow_forward
- 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…arrow_forwardHi. How do you draw the Mundell-Fleming model with a fixed exchange rate and a restrictive monetary policy? Does the IS curve shift to the left whilst the LM curve remains the same.arrow_forwardHow is the real exchange rate determined according to classical and Keynesian theories?arrow_forward
- Consider a world with two countries, the US and Japan. Assuming the standard Keynesian assumptions, please answer the following questions: a) Assuming flexible exchange rates, suppose the US experiences a positive shock to their consumption function so that the entire consumption function for the US shifts upward. Give and explain two reasons why the consumption function would react in this way. b) Draw three diagrams (all pertaining to the US): on the top left, draw the Keynesian cross diagram, on the bottom left, draw an IS - LM diagram, and on bottom right, draw the FX market. Locate the initial point as point A and then show how each diagram is affected by the shock and label as point B, again, assuming flexible exchange rates. Now assume that the US and Japan are in a fixed exchange rate regime. Show how things change and label the new equilibrium, assuming fixed exchange rates as point C (Note: use the same diagrams - i.e., each diagram should have points A, B, and C). c) Explain…arrow_forwardIn a large open economy, the IS curve has been given by Sd(r)-Id(r)=NX(e), where e is the real exchange rate that is positively related to the real interest rate r. Can you illustrate why the IS curve is downward sloping? That is, as Y increases, the real interest rate r is lower in equilibrium.arrow_forwardExplain, with the aid of the IS-LM model for a closed economy, the impact of an expansionary fiscal and monetary policy on the interest rate and the level of output.arrow_forward
- Explain how the flexible exchange rate may be use to correct disequilibrium within an economy.arrow_forwardConsider 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.arrow_forwardIn your macroeconomic lectures you are often told that exchange rates and interest rates are important for macroeconomic decision-making. How does an increase in Japan’s government budget deficit affect each of the following? The real interest rate in the short run in Japan. Explain. Private domestic investment in plant and equipment in Japan. Draw a correctly labeled graph of the foreign exchange market for the euro, and show the effect of the change in the real interest rate in Japan from part (a)(i) on each of the following. Supply of euros. Explain. Yen price of the euro To reverse the change in the yen price of the euro identified in part (b) (ii), should the European Central Bank buy or sell euros in the foreign exchang market? Explain.arrow_forward
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