Assume that for an economy the Marshall-Lerner condition does not hold, and further, elasticities are such that the depreciation of the domestic currency actually worsens the current account balance. Also assume that the economy is operating under flexible exchange rates. Under these conditions discuss the effects of these on: 1. The shape (slope, direction etc.) of the BP curve. 2. Response of the BP curve to a currency depreciation, or appreciation. 3. Response of the IS and LM curves to a currency depreciation, or appreciation. 4. Response of the economy to an expansionary fiscal policy action under relative capital mobility. (BP curve flatter than LM) 5. Response of the economy to an expansionary fiscal policy action under relative capital immobility. (BP curve steeper than LM)

Assume that for an economy the Marshall-Lerner condition does not hold, and further, elasticities are such that the depreciation of the domestic currency actually worsens the current account balance. Also assume that the economy is operating under flexible exchange rates. Under these conditions discuss the effects of these on: 1. The shape (slope, direction etc.) of the BP curve. 2. Response of the BP curve to a currency depreciation, or appreciation. 3. Response of the IS and LM curves to a currency depreciation, or appreciation. 4. Response of the economy to an expansionary fiscal policy action under relative capital mobility. (BP curve flatter than LM) 5. Response of the economy to an expansionary fiscal policy action under relative capital immobility. (BP curve steeper than LM)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Consider a world with only two countries (i.e., two large open economies), the home country and the foreign country. Both countries have a zero current account balance initially. When answering the following questions, clearly label the lines and show the changes in the graph provided below. Give an intuitive explanation for the effects in each case. b-What are the effects on the world equilibrium interest rate, national saving, investment, and the current account balance in each country if home expected future marginal productivity of capital increases? c- What are the effects on the world equilibrium interest rate, national saving, investment, and the current account balance in each country if foreign country experiences a temporary adverse supply shock?
Turkish economy has struggled with current account deficits since the 2000s.However, an adjustment in current account balance was observed in years a) 2001, b) 2009 and c) 2018 and 2019. Discuss what type of automatic mechanisms and adjustment policies might have contributed to this adjustment. Explain clearly by being specific about the type of the mechanism and policy for each year.
This is not a writing assignment, this is a multiple-choice question Which of the below statements about international exchange rates and PPPs (Purchasing Power Parity) would you consider to be INCORRECT? Group of answer choices The PPP only focuses on internationally tradable items, while the exchange rate has a broader focus and includes both internationally tradable and items that are not internationally tradable. Exchange rates include only the values of internationally tradable items, while the PPP includes both internationally tradable items as well as those which are not internationally tradable items but are used by people in different countries. The rate at which one currency can be exchanged for another is the exchange rate. If $25 can purchase a bundle of goods in the U.S. and if a comparable bundle of goods will cost 750 rubles in Russia, then the PPP between the U.S. dollar and the Russian ruble would be $25=750 Russian rubles.
Exchange Rate Regime a. Do you agree with the following statements? Explain your responses briefly by using relevant open economy models/equations. i) In the Short Run, a flexible exchange rate regime seems to be less attractive than a fixed exchange rate regime ii) In the Medium Run, the economy with a flexible exchange rate regime will generate higher levels of output compared to when it operates under fixed exchange rate regime b. Consider an open economy with a flexible exchange rate. Suppose there is a 10% increase in the money stock and assume that it increases the price level by the same percentage in the medium run. If the real exchange rate and the foreign price level are unchanged in the medium run, what must happen to the nominal exchange rate in the medium run?
(a). Use the DD-AA model to examine the effects of an one-time rise in the foreign price level, P* given that the future exchange rate Ee falls immediately in proportion to P*. If the economy is initially in internal and external balance, will its position be disturbed by such a rise in P*? (b). Use the DD-AA model to compare the domestic economic response under flexible and fixed exchange rate regimes to a temporary rise in export demand from foreign countries.
In an open economy that is on a flexible exchange rate, show the short run effects on output and interest rates of a decrease in money supply. To answer this question, draw the following four diagrams: 1. The goods market, 2. The money market 3. The IS-LM curves, and 4. The interest parity condition. Clearly label the initial and new equilibrium points in each diagram. Provide brief explanations for the changes. What is the effect on net exports?
In the short run of a model with sticky prices, a reduction in the money supply raises the nominal interest rate and appreciates the currency. In this case the country's expected real interest rate will In addition, the real exchange rate, after initially will subsequently The latter movement of the real exchange rate satisfies the real interest parity condition which indicates that a country's currency will be expected to undergo a real depreciation when its real interest rate ▼real interest rates elsewhere.
Trinidad and Kenya are trading partners. The Kenyan economy is operating at full employment, and Kenya's current account balance is zero. A. Assume the exchange rate between the Trinidadian dollar (TD) and the Kenyan shilling (KS) changes from 1TD=82KS to 1TD=65KS. Does the KS appreciate or depreciate against the TD? B. Given your answer in Part A, will each of the following increase, decrease, or remain the same? i. The price of Kenyan goods in Trinidadian dollars ii. Kenya's net exports. C. Draw a single correctly labeled graph with the long run Phillips curve for Kenya. On the graph, show the new short run equilibrium as a result of the change in Kenya's net exports from Part Bii, labeled point X. D. Given your answer in Part Bii, will each of the following be in deficit, surplus, or zero for Kenya? i. Current account balance ii. Financial (capital) account balance
Assume that the expected future exchange rate is unchanged and that the central bank holds the real money supply fixed. Draw an IS-LM-IP diagram to show the effect of the drop in consumer confidence. Label all axes and curves and mark all the values and equilibrium points appropriately.
Domestic economy: Consider two open economies in which the real exchange rate is fixed and equal to one. Consumption, investment, government spending, taxes, imports and exports are given by equations on the right for each economy. Variables with "*" denote values for the foreign economy. C = 11 + 0.7 (Y- T) | = 12 Solve for equilibrium output in the domestic economy Y, and foreign economy Y". (Enter your answer as a whole number.) G = 10 T= 9 Y= 89. IM = 0.3Y Y* = 89. EX = 0.3Y* What is the multiplier for each country? Foreign economy: (For the following numerical responses, round your answer to one decimal place.) C* = 11 + 0.7 (Y*- T") The multiplier for the domestic country is * = 12 The multiplier for the foreign country is G* = 10 T* = 9 IM* = 0.3Y* EX* = 0.3Y .....
Consider a small open economy with perfect capital mobility and a flexible exchange rate. Suppose that net capital outflow (NCO) is negative at the world interest rate. Use a two-panel diagram to explain the following a) What is the is the effect of an increase in world interest rate on (i) national saving, (ii) domestic investment, (iii) NCO, (iv) the real exchange rate, and (v) net exports? b) What is the is the effect of an increase in the government budget surplus on (i) national saving, (ii) domestic investment, (iii) NCO, (iv) the real exchange rate, and (v) net exports? c) What is the is the effect of an increase in the government budget deficit on (i) national saving, (ii) domestic investment, (iii) NCO, (iv) the real exchange rate, and (v) net exports? d) What is the is the effect of imposing an import quota on (į) national saving, (ii) domestic investment, (iii) NCO, (iv) the real exchange rate, and (v) net exports?
Please provide detailed explanation for each of the problems.