(Cooperation in ER systems) Suppose Latvia and Denmark both peg their exchange rates to the Euro. (a) Denmark is in an equilibrium in which Y = Y, where Y is the target output level. Latvia is suffering from a negative demand shock that shifts its IS curve to the left, putting its equilibrium output (Y) below its target output (Y). Use an IS-LM figure for each country to show this situation. (b) Suppose Latvia chooses to devaluate its exchange rate against the Euro (i.e., to adjust the level of the exchange rate at which they peg). Show the effect on your figures from part (a) (c) How is Denmark affected by Latvia's choice? Explain.

(Cooperation in ER systems) Suppose Latvia and Denmark both peg their exchange rates to the Euro. (a) Denmark is in an equilibrium in which Y = Y, where Y is the target output level. Latvia is suffering from a negative demand shock that shifts its IS curve to the left, putting its equilibrium output (Y) below its target output (Y). Use an IS-LM figure for each country to show this situation. (b) Suppose Latvia chooses to devaluate its exchange rate against the Euro (i.e., to adjust the level of the exchange rate at which they peg). Show the effect on your figures from part (a) (c) How is Denmark affected by Latvia's choice? Explain.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter14: A Macroeconomic Theory Of The Open Economy

Section: Chapter Questions

Problem 7PA

See similar textbooks

Similar questions

2. Determining long-term exchange rates Consider two countries, the United States and Japan, that trade with each other. Suppose that the productivity growth in the United States accelerates, but it remains the same in Japan. The following graph shows the supply and demand for the Japanese yen in the United States before the change in productivity. The vertical axis is the exchange rate of the yen in terms of the dollar, and the horizontal axis is the quantity of yen Show how the change in productivity affects the equilibrium exchange rate by shifting one or both of the curves on the graph Note: Select and drag one or both of the curves to the desired position. Curves will snap Into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther EXCHANGE RATE (Dollars per yeni Demand QUANTITY (Millions of yen) As a result of the change in productivity, the U.S. doilar appreciates depreciates Demand 161 Supply
2. Determining long-term exchange rates Consider two countries, the United States and Japan, that trade with each other. Suppose that the productivity growth in the United States accelerates, but it remains the same in Japan. The following graph shows the supply and demand for the Japanese yen in the United States before the change in productivity. The vertical axis is the exchange rate of the yen in terms of the doliar, and the horizontal axis is the quantity of yen. Show how the change in productivity affects the equilibrium exchange rate by shifting one or both of the curves on the graph Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther EXCHANGE RATE (Dolars per yen Supply Demand QUANTITY (Millions of yer) As a result of the change in productivity, the U.S. dollar appreciates depreciates Demand Supply
5. Equilibrium rate of exchange Aa Aa Suppose that, initially, the foreign exchange market between the United States and Great Britain is in equilibrium. against However, over time, the demand for the pound shifts to the left, causing the U.S. dollar to the pound. Which of the following is a disadvantage of this change in the demand for fore United States? appreciate the depreciate U.S. exporting firms find it more difficult to compete in the British market. U.S. consumers face lower prices on British goods. U.S. exporting firms find it easier to sell goods on British markets. U.S. consumers face higher prices on British goods.
6. (a) Discuss the efficacy of fiscal and monetary policies under a fixed exchange rate regime, characterized by perfect capital mobility, using AA-DD diagram. (b) Firms exporting to Agriland are not willing to change prices despite a nominal exchange rate depreciation in Agriland. How do you explain this phenomenon? Do you think that the firms exporting to Agriland will behave in a similar manner if there was an exchange rate appreciation in Agriland? Explain. (c) Should the governments be concerned beyond the soundness of individual financial institutions? What is your opinion in this regard in the context of the changing international regulatory environment?
(Table) The balance of trade is: Balance of Payments (Billions of U.S. Dollars) Component Exports Imports Income received Income payments Net transfers Amount $1,800 2,300 490 540 -100 Increase in foreign-owned assets in the United States 700 Increase in U.S.-owned assets abroad 100 O $500 billion. O-$650 billion. O-$500 billion. O $650 billion.
6. Assume the U.S. is a SMALL open economy and has balanced trade. Suppose Congress is worried about the U.S. economy entering a recession following the outbreak of COVID-19, and as a result decreases taxes for households. a. Using the LF model, illustrate and describe the effect of this policy on the U.S. trade balance. b. Using the net exports model, illustrate and describe the effect of this policy on the U.S. real exchange rate.
Q.1.11 What is a foreign exchange rate? (a) The rate at which the currency of one country trades for the goods ofanother country.(b) The rate at which one country’s goods trade for those of anothercountry.(c) The rate at which currencies of different countries are exchanged.(d) The rate at which one country’s currency trades for gold provided byanother country.Q.1.12 As a result of more Americans visiting South Africa, we can expect, ceteris paribus:(a) an appreciation of the rand relative to the dollar.(b) a depreciation of the rand relative to the dollar.(c) an appreciation of the dollar relative to the rand.(d) that it will cost South Africans more to visit the United States.Q.1.13 What is a tariff? (a) A form of subsidy.(b) A tax on imported goods.(c) A tax on foreign property.(d) A form of quota.
15. If China wanted to maintain both monetary autonomy and a fixed nominal exchange rate in regard to the United States in the long run, (a) the Chinese would want to sell their financial assets. (b) the Chinese would have to want to buy American goods. (c) the price level in China would have to move in tandem with the U.S. price level. (d) the law of one price would have to hold for at least one good. (e) Chinese interest rates would have to move in tandem with U.S. interest rates.
4) Consider the following balance of payments data. (in billions of dollars) Merchandise Exports S100 Merchandise Imports $125 Service Imports $90 Service Exports $80 Income received from abroad S110 Income payments to foreigners $150 Increase in US ownership of private assets abroad S160 Increase in foreign ownership of private US assets $200 Increase in home official reserve assets $30 Increase in foreign official assets in US $35 Assuming that unilateral transfers are zero, find the trade balance, the current account balance, the capital and financial accounts balance, the Balance of Payments, and the statistical discrepancy. 5) Suppose that the U.S. sells F-16 fighter planes to the Israeli government. Explain how this transaction creates offsetting credits and debits in the Balance of Payments accounts. 2.
change rate $1.75 1.50 1.25 1.00 200 500 S d 700 900 950 1,000 S D₂ Quantity of euros traded (millions per day) 17) Refer to Figure 30-8. The equilibrium exchange rate is at A $1.25/euro. Suppose the European Central Bank pegs its currency at $1.00/euro. At the pegged exchange rate A) there is a shortage of euros equal to 200 million. B) there is a surplus of euros equal to 700 million. Othere is a shortage of euros equal to 500 million. D) there is a surplus of euros equal to 300 million.
(Flexible Exchange Rate Regime) Use a diagram to aid in your explanations.(a) Use the DD-AA model to show the effects of a temporary tax decrease on income (Y) and the exchange rate (E). (The economy need not be initially at its full employment output level YFE) (b) What impact does the tax decrease have on the country’s current account balance? Does it increase or decrease? Briefly explain.
(A). Figure 1: equilibrium exchange rate is at point 1 where expected dollar returns on dollar and euro deposits are equal. Exchange rate, Egje Return on dollar deposits 2 Ese Esse Ege Expected return on euro deposits R₂ Rates of return (in dollar terms) Suppose there is a rise in the dollar interest rate. Discuss the effects of this rise in the dollar interest rate on the exchange rate.