Macroeconomics (9th Edition)
9th Edition
ISBN: 9780134167398
Author: Andrew B. Abel, Ben Bernanke, Dean Croushore
Publisher: PEARSON
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Question
Chapter 13, Problem 3AP
a
To determine
Effect of W contractionary
b)
To determine
Effect of W contractionary monetary policy on E nominal exchange rate in short run
c)
To determine
Response to W by E if exchange rate is fixed. Impact on output, real exchange rate and net exports in short run.
d)
To determine
Alternative scenario for E.
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Suppose the foreign country is experiencing a recession that reduces foreign output, Y*. To stimulate the economy, foreign central bank pursuits an expansionary monetary policy by reducing foreign interest rate, i*. In an IS-LM-UIP diagram, show the effect of the decrease in foreign output, Y*, and the decrease in the foreign interest rate, i*, on domestic output (Y) and the exchange rate (E), when the domestic central bank matches the decrease in the foreign interest rate with an equal decrease in the domestic interest rate.
Again, suppose you wanted to make domestic industries more competitive but did not want to alter aggregate income. Assuming now a fixed exchange rate, what policy or combination of policies should you pursue, according to the Mundell–Fleming model? Select all that apply
Revaluation
Expansionary monetary
Contractionary fiscal
Devaluation
Contractionary monetary
Expansionary fiscal
Distinguish between the short run and long run determinants of exchange rate volatility. In your assessment show how the exchange rate movements can influence the Interest Parity Condition.
Policy makers can respond to shocks in two possible ways i.e. no policy response and policy stabilisation of economic activity and inflation.
-Use the AS- AD framework to demonstrate how aggregate output and inflation would perform following an aggregate demand shock accompanied by monetary policy stabilisation measures
-Show how the outputs above would differ in case of a permanent shock on supply using the AD-AS framework.
Chapter 13 Solutions
Macroeconomics (9th Edition)
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