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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27.Suppose Turkey has a fixed exchange rate against the dollar. Taxes rise in Canada, reducing Canadian aggregate expenditure. The Bank of Canada adjusts the Canadian interest rate to keep output constant, and Turkey's central bank adjusts its interest rate to keep the exchange rate constant. What happens to Turkey's output and interest rate Output decreases, the interest rate decreases. a) b) None of the answers are correct Output increases, the interest rate decreases. c) Output decreases, the interest rate increases. d) Output increases, the interest rate increases. e)
(a) What is the Marshall- Lerner condition and what is its relevance? (b) What is the J-Curve effect and how is it related to M-L condition? (c) In this part, you are to RELATE the M-L condition to the shape of the demand and supply of the currency, below. Suppose the foreign exchange market is represented by the following diagram where there are only two countries, Canada and Euro zone, trading goods and services with each other. E cs/E 1.8 DE S€ 1.4 1.0 QO Q€ (D€): demand for euro by Canadians = stands for Canada's payments for its imports of goods and services, and (S€): supply of euro by Europeans = stands for Canada's receipt from its exports of goods and services. For simplicity, there are no capital/financial account transactions. Show that the M-L condition is satisfied in this diagram.
2. Suppose the central bank of a country is worried about the economy overheating so it enacts a contractionary monetary policy (reducing the money supply): 2A. Assuming the country has a fixed exchange, illustrate the effects of the contractionary monetary policy with both an IS-LM-BOP graph and a foreign exchange market graph for the foreign currency, explaining which curve(s) shift and why. Explain the effects on GDP, interest rates, and the current account and capital account. 2B. What would the central bank have to do to maintain the fixed exchange rate? Illustrate this on the foreign exchange graph in 2A. (You do not need a new graph). 2C. Define sterilization and explain what the central bank would have to do to sterilize the intervention. Show on your graphs the GDP, interest rate, and exchange rate with sterilized intervention (label as point 1 on the graphs from 2A). 2D. Suppose instead the central bank does not sterilize the intervention. Explain what would happen and…
2. Under what circumstances might an increase in worldwide interest rates be beneficial for a small open economy (SOE)? Explain.
62. Consider the monetary transmission mechanism in an open economy. Other things being equal, an increase in the domestic money supply leads to a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. an appreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand. an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
8. In a small open economy, net exports NX depend negatively on domestic in- come Y and negatively on the real exchange rate & = = eP/P*, where e is the nom- inal exchange rate (the foreign-currency price of domestic currency), and P and P* are the domestic- and foreign-currency prices of domestically and foreign- produced goods, respectively. Assume initially that both P and P* are fixed. There is perfect mobility of capital, so balance-of-payments equilibrium requires that i i*, where i and it are the domestic and foreign interest rates. Assume the economy adopts a flexible exchange rate regime. = (a) Using the IS-LM-BP model, carefully explain whether monetary policy and/or fiscal policy can succeed in raising the economy's GDP. Now assume instead that the economy adopts a fixed exchange rate regime. (b) For each of the policies below, explain what foreign-exchange market intervention is required to support the fixed exchange rate, and whether the policy would succeed in raising…
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
13. Study Questions #13. Ch 11. Suppose the interest rate (on an annual basis) on three-month Treasury bills is 10% in London and 6% in New York, and the spot rate of the pound is $2.03. How can a U.S. investor profit from uncovered interest arbitrage? O Purchase pounds at $2.03 in New York to buy U.K. Treasury bills in London, thus earning 4% per year. O Purchase pounds at $2.03 in New York to buy U.K. Treasury bills in London, thus earning 3% per year. O Purchase pounds at $2.03 in New York and sell them in the U.K., thus earning 4%. O Purchase pounds at $2.03 in New York to buy U.K. Treasury bills in London, thus earning 3.05% per year.
Part A its a long question. in your own words
2 Using figures for both the short run and the long run without PPP, describe the effects of a permanent decrease in the level of Korean money supply on the won/dollar exchange rate (E₩/$), the Korean interest rate (RK), and the Korean price level (PK). Assume that the Korean real national income is constant.

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