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. Consider an open economy with a flexible exchange rate regime, perfect capital mobility and fixed prices both home and abroad. Discuss each of the following:

(i) The process of adjustment of the economy to an increase in foreign output

ii) The effect on the trade balance and possible automatic adjustments

iii) The intervention required by the Central Bank to maintain the exchange rate fixed

 

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Darryn D'Souza
Darryn D'SouzaLv10
29 Sep 2019

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Related questions

The national government increases spending and lowers taxes in an effort to raise RGDP and lower the unemployment rate. However, the budget deficit is increased, so the treasury borrows funds to finance the higher deficit. The country has fixed exchange rates with the US dollar which the central bank maintains through aggressive intervention in the foreign exchange market.

a) If capital mobility is high, the domestic currency will (appreciate or depreciate). The central bank must purchase (dollars or pesos) to maintain the fixed exchange rate. This effect will (support or counter) the goal of stimulating the nation’s economy.

b) The Impossible Trinity holds that a nation can achieve any 2 of 3 goals. List the 3 goals:

1.

In an open economy with global capital markets and mobile capital:

A) a country has control over both its domestic money supply and exchange rate.

B) a country has control of either its domestic money supply or exchange, but not both.

C) a country only has control over its domestic money supply.

D) a country only has control over its exchange rate.

 

2.

An overvalued fixed exchange rate can be maintained only as long as:

A) the country's central bank reserves are available to support currency intervention in the foreign exchange market.

B) the country's central bank can increase the domestic money supply.

C) the country's government increases debt financing.

D) none of the above.

 

3.

The decrease in demand faced by McDonald's during 2001-2002 can be attributed to:

A) decrease in consumer preference for high-fat content food.

B) increase in lawsuits.

C) increase in competitive pressures.

D) all of the above.

All the questions from "Output, Exchange Rates, Macroeconomic Policy, and Open-economy IS-LM-FX Model."

Please answer these questions completely. It is important to me.

Thanks!

6. The TB (i.e., EX – IM) is part of the short-run spending equation. With sticky prices, what would be the effect on the TB with an increase (depreciation) of the home nation's exchange rate?

A. Consumers in the home nation would find it more expensive to buy domestic goods compared to foreign goods, and the trade balance would decrease.

B. Consumers in the home nation would cut back on both domestic and foreign goods and the trade balance would decrease.

C. Consumers in the home nation would increase spending on both domestic and foreign goods, and the trade balance would be unchanged.

D. Consumers in the home nation would increase spending on domestic goods and decrease spending on foreign goods, causing the trade balance to increase.

11. A shift to the left by the IS curve can be achieved by all of the following EXCEPT a(n):

A. decrease in government spending.

B. increase in taxes.

C. increase in the foreign interest rate.

D. decrease in future expected exchange rate Ee.

13. The LM curve will shift to the left, if there is a(n):

A. increase in money supply.

B. increase in interest rate.

C. decrease in money supply.

D. increase in output.

14. If taxes fall and foreign income falls, what will happen to output, ceteris paribus?

A. It will rise.

B. It will stay the same.

C. It will fall.

D. It is uncertain what will happen.

15. Using the IS-LM-FX framework, if we observe that income and interest rate both rise in the Eurozone, this could be the result of

A. contractionary monetary policy pursued by the European Central Bank.

B. expansionary monetary policy pursued by the Federal Reserve System (U.S. central bank).

C. a stock market crash in the Eurozone.

D. increases in government spending in the Eurozone.

18. Whenever U.S. government spending increases,

A. output will not change at all if the U.S. fixes the exchange rate of dollar against major currencies.

B. output will increase by a larger amount when dollar floats than when dollar pegs to other currencies.

C. output will increase by a smaller amount when dollar floats than when dollar pegs to other currencies.

D. output will not change at all since the U.S. adopts a flexible exchange rate.

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