Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
7th Edition
ISBN: 9780134472669
Author: Blanchard
Publisher: PEARSON
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Question
Chapter 19, Problem 6QAP
a
To determine
Interpretation:
When is the fiscal policy desiarable.
b
To determine
Interpretation: Impact on interest rate and output in follower country due to incresae in interest rate of leader country.
c
To determine
Interpretation: Impact on interest rate and output in follower country due to incresae in interest rate of leader country.
d
To determine
Interpretation:
Change in component of output.
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Students have asked these similar questions
Course: Macroeconomics
Subject: Mundell-Fleming Model
EXPLAIN IN DETAIL and GRAPHIC with the Mundell-Fleming model under flexible exchange rate and perfect capital mobility the different chain effects (i.e. changes in macroeconomic variables as PIB, interest rate, exchange rate, Investment, Consumption, currency movement, etc.) that would be generated if the Business Confidence Index falls permanently in a given country. How would the results obtained change if long periods of time (permanent changes) are analyzed through the Aggregate Supply (AS) and Aggregate Demand (AD) Model?
For many years, the Chinese currency has been pegged to the U.S. dollar. Critics argue that this policy has resulted in an unfair advantage for Chinese manufacturers exporting product to the U.S., and has contributed to ballooning U.S. trade deficits. Pressure to revalue, including threats of trade sanctions against China, has led the Chinese government to adopt a slightly more flexible policy which pegs the Yuan to a basket of currencies rather than the dollar alone. Some in the U.S. continue to argue that this is not sufficient, and continue to exert pressure toward a policy of further revaluation. Chinese leaders feel that increasing the value of the yuan relative to the dollar would contribute to economic and political instability in China.
Details:
Pressures for Change
China fixed the value of its currency in 1994 to the US currency
Due to arguments that the yuan was undervalued and that the Chinese government needed to free the currency, the U.S. administration announced…
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 _____
Chapter 19 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
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- You are the chief economic adviser in a small open economy with a floating exchange rate system. Your boss, the president of the country, wishes to increase the level of output in the short run in order to win reelection. Do you recommend using monetary or fiscal policy? Expansionary or contractionary? Use the Mundell-Fleming model to illustrate graphically your proposed policy. State in words what happens to real output, the nominal exchange rate, the level of consumption, the level of investment, and the net exports,arrow_forwardExplain these statements a) “In a flexible exchange rate system with perfect capital mobility, expansionary fiscal policy will always crowd out net exports.”d) “A central bank may not be able to successfully stabilize the economy since monetary policy has long and variable outside lags. But if the central bank knew the exact length of the outside lag, active monetary stabilization policy would always be successful.arrow_forwardUse the monetary model to estimate the exchange rate depreciation. Suppose that the home country is Costa Rica and the foreign country is Brazil. 1. Suppose that the Costa Rican money supply grows at the rate of 6 percent and the Brazilian money supply grows at the rate of 10 percent. What is the expected rate of depreciation in the Costa Rica colon? 2. Suppose that the Costa Rican money supply grows at the rate of 2 percent and the Brazilian money supply grows at the rate of 5 percent. Furthermore, the Costa Rican economy is growing at the rate of 4 percent and the Brazilian economy is growing at the rate of 2 percent. What is the expected depreciation of the Costa Rican colon? 3. Suppose inflation in Costa Rica is 7 percent and inflation in Brazil is 2 percent? What is the expected depreciation of the Costa Rican colon?arrow_forward
- Using the monetary model with flexible price to explain: the effects of an increase in real income on domestic economy under flexible exchange rates. Also comment on the weaknesses of monetary modelarrow_forwardConsider Canada as a small open economy in the LR model and that Canada is a major exporter of primary products. a. Define terms of trade and explain how the terms of trade is to be distinguished from the real exchange rate. Use the Canadian context to illustrate your answers. b. During the period from 1970s to late 1990s, world real commodity prices were reducing. Explain why, as a result, Canada's terms of trade was negatively affected. Also, explain why such worsening of terms of trade implies that autonomous net exports for Canada reduces (<0). Illustrate graphically using the "foreign exchange" market and explain how such a reduction in autonomous net exports will affect equilibrium net exports and the Canadian dollar value. How will Canada's exports of primary products be affected in equilibrium? How will Canada's exports of manufacturing products be affected in equilibrium? Explain.arrow_forwardAgain, 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 fiscalarrow_forward
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