For each of the following statements, show graphically and explain the expected effets of the equilibrium price and output for aggregate demand and aggregate supply, other things remaining constant. a) A lower exchange rate;
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- Consider the classical open-economy macroeconomic model. Explain how a Federal Reserve action such as buying bonds impacts an economy that is operating under the following assumptions: exchange rates are flexible but wages and prices are sticky, there is perfect capital mobility and the economy is already at full employment. Be clear how it impacts GDP, unemployment, inflation, and the exchange rate. Provide the necessary equations to support your answer and diagrams.In the figure below, the aggregate demand function does not go through the origin because: 2. Aggregate demand, D 1. The change in aggregate demand is always positive 45° 3. Aggregate demand is a function of the real exchange rate Aggregate demand function, D(EP /P, Y-T, I, G) investment, government and foreign demand are greater than 0 Output (real income), YIn your macroeconomic lectures you are often told that exchange rates and interest rates are important for macroeconomic decision-making. How does an increase in Japan’s government budget deficit affect each of the following? The real interest rate in the short run in Japan. Explain. Private domestic investment in plant and equipment in Japan. Draw a correctly labeled graph of the foreign exchange market for the euro, and show the effect of the change in the real interest rate in Japan from part (a)(i) on each of the following. Supply of euros. Explain. Yen price of the euro To reverse the change in the yen price of the euro identified in part (b) (ii), should the European Central Bank buy or sell euros in the foreign exchang market? Explain.
- Consider the aggregate demand function, D(EPF/PH, Y-T, I, G) = C(Y-T) + I + G + CA(EPF/PH, Y-T). When Foreign price fell, how would the consumption, the current account and the aggregate demand change: Increase, Decrease or No change? Consumption: Current account: Aggregate demand:Consider the following equation: NX(ɛ) = S - I(r*) This equation is used to draw the diagram illustrating the foreign exchange market, where there is a negative relationship between NX and ɛ; and S, - I(r*) is perfectly inelastic. Here NX is net exports, ɛ is the exchange rate, S represents the level of savings in the economy, I represent the level of investment in the economy, and r is the interest rate. a. Use a carefully labeled diagram to illustrate the effect of a contractionary fiscal policy at home on savings, interest rate, net capital outflow and the exchange rate b. Use a carefully labeled diagram to illustrate the effect of a contractionary fiscal policy abroad on savings, interest rate, net capital outflow and the exchange rateExplain how changes in exchange rates impact the economy through the aggregate demand- aggregate supply (AD/AS) model. Explain how fluctuations in exchange rates can influence loans and banks.
- Suppose that the U.S. dollar-Chinese yuan exchange rate is fixed by the U.S. and Chinese governments. Assume also that labor is immobile between the United States and China due to high transportation costs. Which of the following situations is likely to occur if there is a simultaneous increase in the demand for U.S. goods and a decrease in the demand for Chinese goods? a) The Chinese unemployment rate will increase, and the country will undergo hard economic times for a sustained period. b) The U.S. unemployment rate will increase, and the country will undergo hard economic times for a sustained period. c) The Chinese unemployment rate will initially rise but then drop as the Chinese yuan depreciates against the U.S. dollar. d) The Chinese unemployment rate will initially rise but soon drop as unemployed Chinese move to the United States for employment."In an economy with a high dependency on imported oil, what is the likely macroeconomic impact of a sustained and significant increase in global oil prices? A) An immediate improvement in the trade balance due to Increased export revenues. B) A decrease in inflation as higher oil prices lead to reduced consumer spending. C) An increase in the general price level and potential deterioration of the trade balance. D) Stabilization of the currency value due to increased demand for domestic currency to purchase oil.If the U.S. Dollar appreciates, foreigners will find American goods more expensive because they have to spend less for those goods in USD, meaning with higher prices, the number of U.S. goods being exported will likely drop and leads to a reduction in the Gross Domestic Product (GDP). True or False
- There is trade between the U.S. (domestic country) and Great Britain (foreign country) and the quantity of pounds supplied is positively related to the exchange rate. The exchange rate is defined as the domestic currency price of the foreign currency, i.e., dollars per pound. Using clearly labeled graphs of demand for and supply of the foreign currency, show and explain what will happen to: (i) the demand for pounds and/or; (ii) the supply of pounds; and (iii) the value of the dollar against the pound as a result of each one of the following changes. (a) a decrease in tariffs in the Great Britain. (b) a decrease in prices of goods produced in China. Both the U.S. and Great Britain trade with China. (c) a decrease in interest rates in the U.SQuestion 2 - The Mundell-Fleming model with a fixed exchange rate Consider the Mundell-Fleming model of a small open economy with a constant price level and a flexible exchange rate. Assume that the following variables are exogenously set: G=500; T=1,000. In addition, the consumption function is given by: C=50+0.7(Y-T). Planned investment is given by: IP = 1000 - 50r. The world real interest rate is 6%. Net exports are given by: NX-500-100Є (ε=real exchange rate) Money supply is MS = 1200 Md Money demand is = Y - 40r. P First, compute the equilibrium exchange rate. You do not need to report this value in the answer, but you will need it for the calculations below. Assume that the Central Bank wants to maintain the exchange rate fixed at this level. Now suppose that consumer confidence declines. As a result, autonomous consumption decreases to 30. If the Central Bank wants to maintain the exchange rate fixed, by how much should the Central Bank change its money supply?Consider Alpha, a country that is open to trade in goods and services with the rest of the world, where prices are fixed and in which only the goods market exists. In Alpha, the Marshall-Lerner condition doesn't hold — more precisely, net exports depend positively on the realexchange rate. Initially, the country is in goods market equilibrium, and trade is balanced. Having discussed which of the following three Figures provides a correct representation of the initial equilibrium in Alpha, describe the effects of a real appreciation. In particular, discuss if and how the various curves represented in the graph you have chosen will be affected, and explain the effects of the appreciation of the exchange rate on the equilibrium values of income, consumption, investment and net exports.
