Using the IS-LM graph as well as the related equations and assuming an open economy with flexible exchange rates, illustrate graphically and explain carefully what effect an expansionary monetary policy will have on domestic interest rate, domestic output, and US exports, imports and trade balance. Clearly label all curves and clearly label the initial and final equilibria.

Using the IS-LM graph as well as the related equations and assuming an open economy with flexible exchange rates, illustrate graphically and explain carefully what effect an expansionary monetary policy will have on domestic interest rate, domestic output, and US exports, imports and trade balance. Clearly label all curves and clearly label the initial and final equilibria.

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter22: International Finance

Section: Chapter Questions

Problem 10QP

See similar textbooks

Similar questions

The Jamaican government is contemplating implementing a tariff for imported goods. Consider the Mundell Fleming - IS-LM Analyses with the exchange rate (e) on the vertical axis instead of interest rates (r) and the LM curve is perfectly inelastic. (a) Assume you are in an open economy with floating exchange rates. With the aid of carefully labeled diagrams, use the Mundell Fleming - IS-LM Analyses to illustrate the impact of an increase in tariffs on the exchange rate e, output Y. Explain your answer thoroughly. (b) Assume you are in an open economy now with fixed exchange rates. With the aid of carefully labeled diagrams, use the Mundell Fleming - IS-LM Analyses to illustrate the impact a tariff on the exchange rate e, output Y. Explain your answer thoroughly. (c) Which of the Two exchange rate regimes are better considering the results form parts (a) and (b), explain?
The DD-AA model to the right shows an economy's short-run equilibrium at point 1. Note: 'E' = Es/E: Suppose the government imposes a temporary tariff on all imports. Exchange Rate, E Using the line drawing tool, show the impact of this commercial policy. Properly label this line. Carefully follow the instructions above and only draw the required object. DD1 DD2 According to your graph, the domestic economy will experience E 1 A. a rise in output and a currency depreciation. B. a rise in output and a currency appreciation. Now suppose that with the passage of time it becomes increasingly clear that the tariff will be permanent. This will induce participants in the foreign exchange market to revise their expectations. More specifically, the expected future exchange rate, E°, will decrease. AA1 In the DD-AA model, this revised expectation of the future exchange rate will cause y1 Output, Y O A. a rightward shift in the DD schedule, and thus a reinforcement of the effects produced by the…
Q3-16 If a country's BP curve is flatter than its LM curve, then an external financial shock of a rise in interest rates abroad would, under flexible exchange rates, lead to ________ in the home country's national income.If exchange rates were fixed, this external financial shock would ________ in the home country's national income. Select one: a. a decrease / lead to an increase b. a decrease / also lead to a decrease c. an increase / also lead to an increase d. an increase / lead to a decrease
In an open economy that is on a flexible exchange rate, show the short run effects on output and interest rates of a decrease in money supply. To answer this question, draw the following four diagrams: 1. The goods market, 2. The money market 3. The IS-LM curves, and 4. The interest parity condition. Clearly label the initial and new equilibrium points in each diagram. Provide brief explanations for the changes. What is the effect on net exports?
Q4) Suppose that Covid -19 increases the saving rate of all countries, not only the U.S., so R* decreases. Use the DD-AA model with flexible exchange rates to study the effect of higher savings . Q4B) Discuss how changes in Foreign Demand affect U.S. aggregate demand and output through the Current Account. Draw diagrams and justify all your answers.
A small open economy is described by the following equations: C = 50 + 0.75(Y − T ) I = 200 − 20r NX = 200 − 50ε M/P = Y − 40r G = 200 T = 200 M = 3000 P=3 r∗ = 5 Derive and graph the IS∗ and LM∗ curves. Calculate the equilibrium exchange rate, level of income, and net exports. Assume a floating exchange rate. Calculate what happens to the exchange rate, the level of income, net exports, and the money supply if the government increases its spending by 50. Use a graph to explain what you find. Now assume a fixed exchange rate. calculate what happens to the exchange rate, the level of income, net exports, and the money supply if the government increases its spending by 50. Use a graph to explain what you find.
Domestic economy: Consider two open economies in which the real exchange rate is fixed and equal to one. Consumption, investment, government spending, taxes, imports and exports are given by equations on the right for each economy. Variables with "*" denote values for the foreign economy. C = 11 + 0.7 (Y- T) | = 12 Solve for equilibrium output in the domestic economy Y, and foreign economy Y". (Enter your answer as a whole number.) G = 10 T= 9 Y= 89. IM = 0.3Y Y* = 89. EX = 0.3Y* What is the multiplier for each country? Foreign economy: (For the following numerical responses, round your answer to one decimal place.) C* = 11 + 0.7 (Y*- T") The multiplier for the domestic country is * = 12 The multiplier for the foreign country is G* = 10 T* = 9 IM* = 0.3Y* EX* = 0.3Y .....
The equilibrium interest rate determined in the IS-LM model will give rise to an implied exchange rate in an open economy. Which one of the following statements regarding this relationship is INCORRECT? (a) The interest parity condition implies that there is a positive relationship between the domestic interest rate and the exchange rate; (b) An increase in the interest rate will cause an upward movement along the IS curve and the exchange rate will appreciate; (c) A decrease in the interest rate will result in an upward shift of the LM curve and the exchange rate will appreciate; (d) A decrease in the interest rate will result in a downward shift of the LM curve and the exchange rate will depreciate.
Consider a floating exchange rate regime. How does higher government purchases affect output and interest rate in equilibrium? Answer and discuss with the help of the diagram given (e.g., show what curves will shift, label curves and axes correctly). Consider a fixed exchange rate regime. How does higher government expenditure affect output and interest rate in equilibrium? Discuss with the help of the diagram (e.g., show what curves will shift, label curves and axes correctly). Are your conclusions in (1) and (2) consistent with Mankiw's conclusion using the IS-LM diagram drawn in exchange rate-Output axes? Discuss.
1) Large current account deficits imply large financial account surpluses. True Or False?Explain. 2) The longer the "pass-through" period following a devaluation, the faster the desirable balance of trade effects of a devaluation will appear on quantities traded. True or False? Explain. 3) Suppose we observe the following 1-year interest rates: į Turkey = 10% į USA = 2% The exchange rate is quoted as theTL price of dollars and is currently E = 6.0 TL Given the information above, what is the 12-month forward rate? 4) How is the balance of payments linked to national saving and investment? Explain.
A small open economy is described by the following equations: C = 300 + 0.8(Y – T) | = 220 - 40r NX = 300 - 60 e G = 200 T = 150 M = 1500 P = 3 r* = 5 L = Y - 60r If G increases by 30 to 230 Assuming fixed exchange rate: Equilibrium net exports is %3D
1) Large current account deficits imply large financial account surpluses. True Or False?Explain. 2) The longer the "pass-through" period following a devaluation, the faster the desirable balance of trade effects of a devaluation will appear on quantities traded. True or False? Explain. 3) Suppose we observe the following 1-year interest rates: į Turkey = 10% į USA = 2% The exchange rate is quoted as the TL price of dollars and is currently E = 6.0 TL Given the information above, what is the 12-month forward rate? 4) How is the balance of payments linked to national saving and investment? Explain.