2. Suppose that there is a wave of pessimism in the economy due to Covid-19 and, as a result,the economy is operating below its natural level of output with high unemployment and lowinflation. So, the central bank decided to stimulate the economy. Assume a small openeconomy with perfect capital mobility and a flexible exchange rate system.a) (i) Should the central bank increase or decrease the money supply if it wants to stimulatethe economy? Explain.(ii) List two monetary policy tools that the central bank uses to influence the moneysupply and explain how each tool should be applied to be consistent with your responsein (i).b) Which macroeconomic variables change immediately and in what direction?c) Which macroeconomic variables change over the short run and in what direction?d) What happens to employment and inflation? Does the rate of economic growth increase?

a) (i) Should the central bank increase or decrease the money supply if it wants to stimulate the…

Answered: 2. Suppose that there is a wave of…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Q3-11 If a country ties its currency to a specific foreign currency and allows its holdings of that currency to govern the country's money supply, this arrangement is known as a Select one: a. currency board. b. floating exchange rate. c. monetary union. d. Special Drawing Right.
4
9 Suggest how the multinational company (MNC) could reduce/eliminate the exchange rate risk
1. Summer1 Digital (Summer1) is a multinational corporation that produces and distributes telecommunications technology. Although its corporate headquarters are located in Kuala Lumpur, Malaysia, Summer1 usually buys its materials in several different countries using several different foreign currencies. The matter is further complicated because Summer1 often sells its products in other foreign countries. Summer1 is concerned with economic conditions that could adversely affect ringgit exchange rates. Explain Malaysias economic conditions in 2021. Evaluate the risks that need to be considered by Summer1 if it decides to continue buying materials from other countries including China and Indonesia as well as selling its products in countries such as Hong Kong and Japan. Discuss ways to manage and minimise the impacts of the risks associated with Techno1’s materials purchase and products sales in the foreign countries.
2 Using figures for both the short run and the long run without PPP, describe the effects of a permanent decrease in the level of Korean money supply on the won/dollar exchange rate (E₩/$), the Korean interest rate (RK), and the Korean price level (PK). Assume that the Korean real national income is constant.
QUESTION 4 Using information from problem 3, suppose that the financial crisis worsens and now the supply curve for USD is 91+e. bln dollars per week and the demand curve is 155 - e bln dollars per week. The central bank still commits to its pledge to support the exchange rate if Peso depreciates by over 20% from the original level (more specifically, in this case the fixed exchange rate will be 20% higher than the original level). To maintain the fixed exchange rate, the central bank will have to spend billion dollars of foreign exchange reserves per week. Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard may automatically delete it and you should not do anything about it. In case of percentages, do not type in the percentage…
3. Target zone regimes Suppose the fictional country of Jablor has implemented a target zone exchange rate regime. The Jablorian central bank has set an upper and lower bound for the value of its currency, the Jablorian dollar, and has intervened when the value of its currency has approached either bound. The following diagram tracks the value of the Jablorian dollar over time. VALUE OF THE CURRENCY TIME Upper Bound - ? Market-determined Exchange Rate Lower Bound
7 Assume that Vietnam is an open economy(i.e it trades with the rest of the world) but does not allow capital mobility Show the effects of: A, an contraction monetary policy under a fixed exchange rate regime B, an expansionary monetary policy under flexible exchnage rate regime (Use graph of the IS-LM to elaborate your answers)
1. Suppose in the New Keynesian open-economy model that there is a negative output gap andthe central bank decreases the current money supply.(a) Assuming that the exchange rate is flexible. Draw diagrams for the labour, goods andmoney markets, and the production function. Determine the equilibrium effects of thisdecrease in the money supply on employment, output, consumption, investment, money,real wages, the real interest rate, the price level and the exchange rate. Provide a detailedeconomic analysis explaining your results with the aid of the diagrams.(b) Repeat part (a) for the case of a fixed exchange rate.
4. Short Answer Questions: If the price level in Japan is 1.0, the price level in the U.S. is 2.0, and it costs 100 yen to buy one dollar, then the nominal exchange rate is exchange rate between the U.S. and Japan is goods. _dollar / yen, the real Japanese goods per US 5. In order for an individual to be indifferent between holding foreign or domestic bonds, A. the Marshall-Lerner condition must hold. B. the foreign and domestic interest rates must be equal. C. the expected rate of depreciation of the domestic currency is zero. D. the interest parity condition must hold. 6. Assume that the interest parity condition holds. Also assume that the U.S. interest rate is 8% while the U.K. interest rate is 6%. Given this information, financial markets expect the pound to _(appreciate / depreciate) by %.
D Question 30 There are two countries in the world, A and B. Suppose the central bank in country A has an annual inflation target = 0.03 while the central bank in country B has an annual inflation target T = 0.02. In the long run, we would expect the real exchange rate of country A to depreciate against country B at a rate of about 1% per year. True or False? Explain.

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