Macroeconomics (9th Edition)
9th Edition
ISBN: 9780134167398
Author: Andrew B. Abel, Ben Bernanke, Dean Croushore
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 13, Problem 3NP
To determine
To Evaluate: Effects on different economic variable under different condition using IS-LM model.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
You are the economic advisor to the Government of Sweden, a country that is not a member of the European Union but trades quite a bit with EU countries and with whom there is a high degree of capital mobility.
(a) Suppose that the members of the European Union enact a large tax cut financed by a large increase in their deficit. What should happen to exchange rates in Sweden? What should happen to Sweden’s trade balance? Show the effects using appropriately labeled graphs, including that of the foreign exchange market.
(b) Suppose instead that the European Central bank increase the money supply. What should happen to exchange rates in Sweden? What should happen to Sweden’s trade balance? Show the effects using appropriately labeled graphs, including that of the foreign exchange market.
(c) If you are very interested in keeping the Swedish exchange rate constant at the rate it was before the EU tax cut, what specific policy would you recommend to do this, i.e. to keep your currency from…
What happens when international financial capital is completely free to move in and out of countries in search of investment or speculation opportunities?
a.
Countries lose autonomy to affect GDP through monetary policy under a free-floating exchange rate policy.
b.
None of the alternatives is correct.
c.
Countries lose autonomy to affect GDP through fiscal policy under a fixed exchange rate policy.
d.
Countries lose autonomy to affect GDP through fiscal or monetary policies regardless of the exchange rate policy.
e.
Countries retain autonomy to affect GDP through fiscal or monetary policies regardless of the exchange rate policy.
Q)1
Please use the analytical techniques we developed in class to explain how an increase in the Oman government budget deficit will affect the real exchange rate. Be sure to include (A)a graph of the market for loanable funds in Oman,
(B) a graph that shows the amount of net capital outflow as a function of the interest rate, and (C) a graph representing the market for foreign currency exchange. Provide a brief written description in addition to the graphs.
Q2)
From the following table, calculate GDP, GNP, Net national product, National income, Personal income and Disposable personal income
In millions of dollars
Chapter 13 Solutions
Macroeconomics (9th Edition)
Knowledge Booster
Similar questions
- Let S be the USD/GBP exchange rate, P∗ be the pound cost of a consumption basket in the U.K., and P be the dollar cost of a consumption basket in the U.S. Using the units of S, P∗, and P, find the units of the real exchange rate, Q = S (P∗/P).arrow_forwardLet S be the USD/GBP exchange rate, P∗ be the pound cost of a consumption basket in the U.K., and P be the dollar cost of a consumption basket in the U.S. Using the units of S, P∗, and P, find the units of the real exchange rate, Q = SP∗/Parrow_forwardPQ 23 Assuming a flexible exchange rate, in the balance model, what effect, other factors constant, will a foreign government budget deficit financed by issuing bonds have on the home country's currency value?arrow_forward
- Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the dollar. Assume that the economy is currently experiencing a balanced government budget. NOTE: follow RED ARROWS for the order of the questions (IT IS PART OF THE SAME QUESTION!!!!!) NOTE: HERE ARE THE OPTIONS FOR THE BLANKS: Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencing _____ (a trade deficit OR balanced trade OR a trade surplus) Now, suppose the government is experiencing a budget deficit. This means that ______ (national saving will increase OR national saving will decrease OR domestic investment will increase OR domestic investment will decrease), which leads to ______ (an increase in the supply of OR…arrow_forwardSuppose the Bank of Canada contracts the money supply in an effort to reduce aggregate demand by a particular amount, say $10 billion. If Canada was a closed economy, would the amount by which the Bank of Canada would need to reduce the supply of money to accomplish this goal be greater or smaller than the amount it would need to reduce the supply of money if Canada was a small open economy with a flexible exchange rate?arrow_forwardConsider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencing___________ .Now, suppose the government is experiencing a budget deficit. This means that _________, which leads to ___________loanable funds.After the budget deficit occurs, suppose the new equilibrium real interest rate is 6%. The following graph shows the demand curve in the foreign-currency exchange market.arrow_forward
- For the above condition to hold, perfe mobility must be assumed and the domestic interest rate must be the foreign interest rate. equal to higher than lower than 2. When a country pegs its exchange rate, an increase in government spending A. the foreign rate. B. the interest rate. C. output. D. all of the above (G) increases: all of the above 3. In an economy with fixed exchange rates that is performing near full output, ______could become an issue that monetary policy would otherwise be able to address in an economy with flexible exchange rates by _____arrow_forwardSuppose that a nation has a current account deficit of 80 million dollars and a financial account surplus of 20 million dollars. How would the central banks’ foreign reserves change ?( Answer the question based on the assumption that there is no change in financial account). Now suppose that foreigners purchased 80 million worth of domestic assets. How would this affect the balance of payments accounts and central banks’ reserves?Please 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_forward
- For an investment in a foreign-currency-denominated financial asset, which of the followings is/are true? * The overall return to such an investment comes only from the return on the asset itself. The overall return to such an investment comes only from changes in the exchange-rate value of the foreign currency The overall return to such an investment comes from both the return on the asset itself and changes in the exchange-rate value of the foreign currency The value of investment (in terms of home currency) increases If the foreign currency value increases relative to my own currency. Both c and d Explain with no plagiarismarrow_forwardSuppose that Country A developing country and Country B is a developed country. Country A Policy Interest Rate: 19% Country A Inflation Rate: %16 Country B Policy Interest Rate: %0.25 Country B Inflation Rate: %2 Considering the inflation and interest differential between the Country A and Country B, what is likely to happen to real exchange rate in Country A? Calculate and show answer.arrow_forwardSuppose that Russia decided to increase interest rates by %2. Considering the inflation and interest differential between the US and Russia, what is likely to happen to real exchange rate in Russia?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning