Log in
Economics
1
answer
0
watching
298
views
23 Jan 2019

2. Suppose instead, real GDP in the United States falls temporarily instead. Contrast the immediate effect of the temporary shock on interest rates and the exchange rate compared to the permanent shock.

a. (20 points) Draw two diagrams with the money market diagram for the US on the left and the expected return in $/ exchange rate ($/yen) diagram on the right. Label the impact effect, when the shock is temporary, as point B and the impact effect when the shock is permanent as point C.

b. (5 points) Why are these impact effects on the exchange rate different? Explain.

c. (5 points) Assuming again that the shock to real GDP in the US was temporary, what would happen to the nominal interest rate in the US and the exchange rate in the long-run. Explain.

3. Denmark pegs their currency, the krone, to the euro.

a. (10 points) Draw two diagrams, side by side with the money market diagram for Denmark on the left and the expected return in krone / exchange rate diagram on the right hand side. Label the initial equilibrium point A. Denmark suffers from an adverse productivity shock and goes in a recession. Show how your two diagrams are affected by the recession in Denmark. Assume that the peg is credible. b.

b) (10 points) Suppose Denmark prefers to fight the recession via counter-cyclical monetary policy by increasing the money supply in hopes of lowering interest rates in Denmark. Explain what would happen...i.e., would they be successful or not? Be sure to mention capital flows and use the term(s) 'capital flight' and/or 'hot money,' whichever applies. Make sure to use a balance sheet - T - account for Denmark's central bank and show/explain how the money supply changes endogenously.

Watch
1
answer
0
watching
298
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Nelly Stracke
Nelly StrackeLv2
25 Jan 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related textbook solutions

Principles of Economics
2nd Edition, 2017
Openstax
ISBN: 9781947172364
Principles of Macroeconomics
2 Edition,
Openstax
ISBN: 9781947172388
Principles of Microeconomics
2 Edition,
Openstax
ISBN: 9781947172340

Related questions

Consider the relationship between the Japanese yen (¥) and the U.S. dollar ($). Let the exchange rate be defined as $ per ¥, E = $/¥. Apply the money market – foreign exchange market diagrams to answer the following questions. On all graphs, label the initial equilibrium point A.
1) Illustrate how a temporary decrease in Japan’s money supply affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C.
2) Refer to the diagram from (1), state how each of the following variables changes in the short-run (increase/decrease/no change): U.S. interest rate, Japanese interest rate, spot exchange rate E, expected future exchange rate F, and U.S. price level.
3) Refer to the diagram from (1), state how each of the following variables changes in the long run (increase/decrease/no change relative to their initial values at point A): U.S. interest rate, Japanese interest rate, E, F, and U.S. price level.

Question 32

  1. Tim, a citizen of the United States living in Virginia, buys a computer that was made in South Korea by a Japanese firm. This transaction would affect the GDP of the United States in which way?

    Net exports would decrease and GDP would decrease.

    Net exports would decrease and GDP would be unaffected.

    Net exports would increase and GDP would increase.

    Net exports would increase and consumption would increase.

1 points

Question 33

  1. An increase in U.S. government spending tends to

    increase U.S. interest rates and increase the U.S. capital account surplus.

    increase U.S. interest rates and decrease the U.S. capital account surplus.

    decrease U.S. interest rates and increase the U.S. capital account surplus.

    decrease U.S. interest rates and decrease the U.S. capital account surplus.

1 points

Question 34

  1. A _______ is a system in which the government intervenes extensively in the foreign exchange market to keep the exchange rate within certain bounds.

    dirty float

    floating exchange rate

    fixed exchange rate

    dollarization

1 points

Question 35

  1. Suppose the exchange rate between the euro and the dollar is E0.5 to $1. If a Big Mac costs $3 in the United States and E1.5 in Germany, then the real exchange rate is

    1:1.

    2:1.

    1:2.

    It cannot be determined from this information.

1 points

Question 36

  1. Which of the following prevent the purchasing power parity theorem from holding perfectly?

    transportation costs

    goods that cannot be shipped

    tariffs and quotas

    Each of these answers is correct.

1 points

Question 37

  1. Fiscal policy is more effective in affecting economic activity if

    many resources are unemployed.

    there is a real shock instead of an aggregate demand shock.

    the economy returns to the long-run condition almost immediately.

    there is a long implementation lag.

1 points

Question 38

  1. In a typical year, changes in government spending compared to overall spending are relatively

    small.

    large.

    unpredictable.

    well-timed.

1 points

Question 39

  1. Which statement is TRUE about the difference between monetary and fiscal policy?

    Fiscal policy can quickly adjust to changes in aggregate demand.

    Fiscal policy can have a more direct impact.

    Monetary policy is subject to many long lags.

    Monetary policy can affect the economy regardless of the actions banks take.

1 points

Question 40

  1. Fiscal policies that help an economy in a recession without additional actions by policy makers are called

    consumption smoothers.

    Ricardian equalizers.

    automatic stabilizers.

    Each of these answers is correct.

1 points

Question 41

  1. The U.S. individual income tax system can best be described as a

    regressive tax system.

    flat tax system.

    zero tax system.

    progressive tax system.

1 points

Question 42

  1. What demographic change in the United States will cause government spending to increase in the next 50 years?

    The population over 65 will grow.

    The population will be younger.

    Women will have fewer children.

    Immigration will increase.

1 points

Question 43

  1. What kind of rising costs will mostly cause U.S. government spending to skyrocket in the future?

    defense

    environmental protection

    education

    health care

1 points

Question 47

  1. The Fed could have popped the bubble of the housing boom in the 2000s by

    lending directly to homeowners.

    regulating the stock markets more.

    reducing the growth rate of the money supply.

    doing nothing.

1 points

Question 48

  1. Which of the following would be an example of running monetary policy by rules?

    A 5 percent increase in money supply automatically leads to a 2 percent increase in real GDP.

    An increase in money supply automatically leads to an increase in inflation.

    The Fed will increase money growth to different levels, depending on the severity of the recession.

    A 1 percent drop in real GDP will automatically elicit a 2 percent increase in money supply.

    Question 50

    Moral hazard occurs when

    the failure of one financial institution can bring down other institutions as well.

    financial institutions take on too much risk because they are insured.

    financial institutions become insolvent because they issued too many loans.

    there are more short-term liabilities than short-term assets.

    Which of the following is NOT a transmission mechanism?

    reductions in the money supply

    intertemporal substitution

    uncertainty

    sticky wages and prices

    Question 56

    For a given increase in government spending growth, intertemporal substitution is more widespread when

    the impact of AD growth on both inflation and real GDP growth is stronger.

    the impact of AD growth on both inflation and real GDP growth is weaker.

    the impact of AD growth on inflation is stronger and the impact of the AD growth on real GDP growth is weaker.

    the impact of AD growth on inflation is weaker and the impact of AD growth on real GDP growth is stronger.

    Stalin:

    instituted democratic reforms, leading to widespread prosperity.

    took government control of the farms in Ukraine, leading to the starvation of millions of people.

    increased the provision of public goods, which had a positive effect on lowering the unemployment rate.

    tried unsuccessfully to expand voting rights in 1924 Russia.

    1 points

    Question 60

    1 points

    Question 59

    If voters care about two issues such as taxes and war, then politicians:

    will form a stable policy on these issues.

    can pose a policy that will never lose against another policy.

    must assume that there is no median voter.

    may never converge on a stable outcome.

    1 points

    Question 58

    Policy A adversely affects 50 million people at a cost of $1 per person. But Policy A also benefits 1,000 people at $30,000 per person. Which of the following statements is true?

    Policy A will not become law because it hurts more people than it helps.

    Policy A concentrates all the costs among a small group of people and all the benefits among a large group of people.

    Policy A is likely to be supported by politicians even though it makes society worse off.

    Since Policy A negatively affects many people, and so rational ignorance will not be a problem.

    1 points

    Question 57

    Data for the United States show that the incumbent party tends to win the election if:
    I. personal disposable income is growing.
    II. the inflation rate is low.
    III. the political party has not been in power for too many continuous terms.

    I only

    I and II only

    I and III only

    I, II, and III

    1 points

    Question 53

    1 points

    Question 52

    What is the purpose of the Fed's structure?

    to give the President of the United States as many tools as possible to regulate the economy

    to make sure all states are given equal access to monetary policy decisions

    to keep the private sector out of the monetary policy making arena

    to keep the power of the Fed dispersed

    1 points

    Question 51

    An increase in money growth will cause inflation to increase in

    the short run only.

    the long run only.

    both the short run and the long run.

    neither the short run nor the long run.

QUESTION 46

When the Fed buys a U.S. bond in the open market

its action has no effect on the total reserves or the money supply because the check it writes increases reserves at one bank but they fall at another.

its action expands total reserves and the money supply.

its action contracts total reserves and the money supply.

total reserves increase by the amount of the purchase but the money supply stays the same.

1.11 points

QUESTION 47

When the Fed sells government securities,

reserves increase, leading to a decrease in the money supply by an amount more than the sale of the government securities.

reserves decrease, leading to a decrease in the money supply by an amount more than the sale of the government securities.

reserves increase, leading to a increase in the money supply by an amount more than the sale of the government securities.

reserves decrease, leading to a increase in the money supply by an amount more than the sale of the government securities.

1.11 points

QUESTION 48

The maximum potential money multiplier is equal to

the reserve ratio.

one minus the reserve ratio

the inverse of the required reserve ratio.

the number of dollars on reserve.

1.11 points

QUESTION 49

The potential money multiplier gives us

the growth in the money supply when income increases.

the growth in real national income when the money supply increases.

the maximum potential change in the money supply due to a change in income.

the maximum potential change in the money supply due to a change in reserves.

1.11 points

QUESTION 50

An increase in the reserve ratio

increases the money multiplier.

will cause banks to make more loans.

has an expansionary effect on the money supply.

has a contractionary effect on the money supply.

1.11 points

QUESTION 51

The Federal Deposit Insurance Corporation insures

banks against lawsuits.

the deposits held in member banks.

the deposits held in the Fed.

the federal funds market.

1.11 points

QUESTION 52

Bank runs are a possibility because

in difficult times people want currency instead of demand deposits.

the FDIC is inefficient.

banks do not keep enough reserves to cover all their depository liabilities.

bankers are often poor businesspeople.

1.11 points

QUESTION 53

The manner in which FDIC deposit insurance is set up in the United States encourages banks to

make riskier loans than they otherwise would.

reject some loans that probably would be profitable.

maintain excess reserves that are too great.

be too conservative in their lending practices.

1.11 points

QUESTION 54

The Federal Deposit Insurance Corporation

discourages banks from engaging in excessive risk taking.

was established after the Panic of 1907.

only insures deposits in money-center banks.

increases the stability of the banking system by reducing the likelihood of bank runs.

1.11 points

QUESTION 55

What are the two features of money that distinguish it from all other goods in the economy?

Money is government issued and it is redeemable for gold or silver.

Money is part of every barter transaction and it is divisible.

Money is accepted as a medium of exchange and it is the common unit of account used to express prices.

Money is a common unit of account and it is also can be traded for other currencies at a guaranteed exchange rate.

1.11 points

QUESTION 56

Holding money to meet unplanned expenditures and emergencies is known as

asset demand.

precautionary demand.

aggregate demand.

transactions demand.

1.11 points

QUESTION 57

When people want to hold money to make regular planned expenditures, this is

the transaction demand for money.

the spending demand for money.

the asset demand for money.

the precautionary demand for money.

1.11 points

QUESTION 58

When interest rates rise, the transactions demand for money usually

decreases.

increases.

decreases initially and then increases to the original position.

does not change.

1.11 points

QUESTION 59

As nominal Gross Domestic Product (GDP) rises, the transactions demand for money

increases, and the money demand curve shifts to the right.

remains constant, and the money demand curve remains the same.

decreases, and the money demand curve shifts to the left.

increases, and the money demand curve shifts to the left.

1.11 points

QUESTION 60

One of the economic costs of holding currency is that

it fulfills no precautionary role.

it fulfills no transactions role.

it earns no interest income.

its real value always increases.

Related Documents

ECO 2143 Chapter Notes - Chapter 19-24: Quantitative Easing, Business Cycle, Life Insurance
ambercheetah378
ECO349H5 Lecture Notes - Lecture 2: Nominal Interest Rate, Cambodian Riel, Autarky
cyancod662
ECO105Y1 Chapter Notes - Chapter 10: Canadian Dollar, Interest Rate Parity, Demand Shock
orchidcamel574

Weekly leaderboard

Home
Homework Help 3,900,000
Economics 400,000
Start filling in the gaps now
Log in