Use the money market diagram and the IS-LM-FX model to show graphically th decrease in money demand on the output, interest rate, exchange rate, consumptic investment, and trade balance. Assume a floating exchange rate regime.
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- Using the IS-LM -FX diagram, show graphically and explain the effects of a contractionary monetary policy under a fixed exchange rate regime. What happens to output, interest rate, and the exchange rate?Under a floating exchange rate system, use the Mundell-Fleming model to predict with the aid of a graph, what would happen to the following variables when the money supply is reduced. Exchange Rate: (increase, decrease, or unchanged?) Trade Balance: (increase, decrease, or unchanged?) Aggregate Income: (increase, decrease, or unchanged?) Please provide a graph to support your answer.Explain how the exchange-rate transmission mechanism can strengthen the interest-rate transmission mechanism following an expansionary monetary policy under a floating exchange rate regime.
- Use the IS-LM-UIP (open-economy IS-LM model) to analyze the effects of an increase in the foreign interest rate on domestic output and the nominal exchange rate under a flexible exchange rate regime and assuming that the domestic central bank leaves the policy rate unchanged. Please be sure to indicate how the relevant curves shift. With a diagram Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.Use the DD-AA model to analyze the impact of a transitory decrease in the Foreign interest rate R* on the domestic economy. (Use the “standard” DD/AA model where changes in the interest rate have no effect on the DD curve.). Note: You can use one (large!) diagram to answer questions (a) and (b). (a) If the country operates with a flexible exchange rate regime what impact will this have on the country’s exchange rate E, level of domestic output Y, and the level of the country’s Current Account (CA) balance? Briefly explain.(b) If the country operates with a fixed exchange rate regime what impact will this have on the country’s money supply M, level of domestic output Y, and the level of the country’s Current Account (CA) balance? Briefly explain.Assume that we are in a floating exchange rate regime. The price of oil went up, driving the economy to a much higher unemployment rate. Use a standard IS-LM-BP model to explain what happens to income, interest rates and the balance of payment if the central bank uses monetary policy to stabilise the economy at potential output
- Macroeconomics. Explain how the exchange rate adjusts to a temporary decrease in the foreign interest rate, R*, holding output constantYou are the chief economic adviser in a small open economy with a floating exchange rate system. Your boss, the president of the country, wishes to increase the level of output in the short run in order to win reelection. Do you recommend using monetary or fiscal policy? Expansionary or contractionary? Use the Mundell-Fleming model to illustrate graphically your proposed policy. State in words what happens to real output, the nominal exchange rate, the level of consumption, the level of investment, and the net exports,which of the following is an assumption of the monetary approach to the exchange rates? A - PPP Holds B - UIRP holds C - prices are flexible D - All of the above E - Only A and C of the above
- Explain why permanent monetary expansion has a larger effect on output than temporary monetary expansion in case of a floating exchange rate regime in the short run.Suppose the foreign country is experiencing a recession that reduces foreign output, Y*. To stimulate the economy, foreign central bank pursuits an expansionary monetary policy by reducing foreign interest rate, i*. In an IS-LM-UIP diagram, show the effect of the decrease in foreign output, Y*, and the decrease in the foreign interest rate, i*, on domestic output (Y) and the exchange rate (E), when the domestic central bank matches the decrease in the foreign interest rate with an equal decrease in the domestic interest rate.Consider an open economy with a fixed exchange rate regime. This economy initially has high unemployment. What is the price level adjustment process through which the economy returns to its natural rate of unemployment in the medium run? Explain, please use a graph