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.

Consider the AA-DD model with flexible exchange rates. Assume the economy is initially at full employment. answer B only!  Suppose a temporary shock to the money demand pushes the economy into recession. Describe one policy intervention that takes the economy back to its pre- shock equilibrium position. b)  How does your previous answer change if the temporary shock originates in the goods’ market?

3) Consider an open economy and use the IS/TR model together with uncovered interest parity condition (UIP) to answer the following questions: (a) Discuss and illustrate how globalization (NX) and interdependence of financial markets (UIP) can affect the propagation of international shocks. (b) Discuss and illustrate with the IS/TR and UIP graphs the effects on the domestic economy of an increase in the interest rate by a big foreign economy, affecting the level of the international interest rate. Assume that the domestic economy is adopting perfect capital mobility and a flexible exchange rate regime. (c) Why might a rise in international interest rates lead to hyperinflation in some highly-indebted countries? (d) A risk neutral investor in London has two investment opportunities. They can invest in one year UK government bonds with an annual nominal interest rate of 5%. Or they can invest in one year US government bonds with an annual nominal interest rate of 2.5%. Currently the spot…

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.