Discuss the features of the IS-LM-FE model and explain how the model’s assumptions on the sensitivity of international capital flows to interest rate differentials affect the slopes and the positions of the IS, LM and FE curves.
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Discuss the features of the IS-LM-FE model and explain how the model’s assumptions on the sensitivity of international capital flows to interest rate differentials affect the slopes and the positions of the IS, LM and FE
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- An open economy interacts with the rest of the world through its involvement in world markets for goods and services and world financial markets. Although it can often result in an imbalance in these markets, the following identity must remain true: Net Capital Outflow = Net Exports In other words, if a transaction directly affects the left side of this equation, then it must also affect the right side. The following problem will help you understand why this identity must hold. Suppose you are the purchasing manager for a large chain of restaurants in the United States, and you need to make your semiannual purchase of tea. You pay $1,500,000 for a shipment of tea from an Indian tea producer. Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "0" in the Magnitude of Change column. Hint: The magnitude of change should always be positive,…An open economy interacts with the rest of the world through its involvement in world markets for goods and services and world financial markets. Although it can often result in an imbalance in these markets, the following identity must remain true:Net Capital Outflow = Net Exports In other words, if a transaction directly affects the left side of this equation, then it must also affect the right side. The following problem will help you understand why this identity must hold.Suppose you are the purchasing manager for a large chain of restaurants in the United States, and you need to make your semiannual purchase of tea. You pay $1,500,000 for a shipment of tea from an Indian tea producer.Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "0" in the Magnitude of Change column.Hint: The magnitude of change should always be positive, regardless…Question 10. Applying the Mundell-Fleming model analyse the impact on domestic income, interest rate, CA and KA of the following events: (a) an increase of foreign interest rate; (b) a fall of foreign demand on domestic goods. Provide an analysis for two different countries: country A with fixed exchange rate and perfect capital mobility country B with flexible exchange rate and imperfect capital mobility please do not make a long description but provide graphs and short analysis
- Explain, with the aid of the IS-LM model for a closed economy, the impact of an expansionary fiscal and monetary policy on the interest rate and the level of output.An open economy interacts with the rest of the world through its involvement in world markets for goods and services and world financial markets. Although it can often result in an imbalance in these markets, the following identity must remain true: Net capital outflow = net capital In other words, if a transaction directly affects the left side of this equation, then it must also affect the right side. The following problem will help you understand why this identity must hold. Suppose you are a software engineer living in the United States, and you just sold your latest product to a Russian consumer for RUB 7,000. Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "0" in the Magnitude of Change column. Hint: The magnitude of change should always be positive, regardless of the direction of change. Because of the identity equation that…Determine the impact of productivity differentials (across tradable and non-tradable sectors) on the real exchange rate and state the main predictions of the Balassa-Samuelson model.
- Can you provide a detailed analysis and conclusion Using the Mundell Fleming model and portfolio based model analyse the disadvantages and advantages of Bulgaria joining the eurozone with emphasis on macroeconomic characteristics. Provide detailed analysis on the affects. And conclude whether they should join or notUsing examples and clearly labelled graphs where applicable answer the following question: Under what circumstances might an increase in worldwide interest rates r* be beneficial for a small open economy (SOE)? Explain3) 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…
- Consider the zero capital mobility framework. If the economy is in long-run equilibrium, determine the equilibrium price of domestic goods as a function of the exchange rate, foreign prices, and full-employment income. Determine also the cconomy's cquilibrium interest rate.The dollar-euro exchange rates are freely determined in foreign exchange market. Suppose that the Federal Reserve is expected to lower nominal interest rate next month. Use the IS-LM-FX model to illustrate the effects of such expectations on the following variables today: output (Y), nominal interest rate (i), exchange rate (E), investment (I) and trade balanceConsider the zero capital mobility framework. If the economy is in long-run equilibrium, determine the equilibrium price of domestic goods as a function of the exchange rate, foreign prices, and full-employment income. Determine also the economy's equilibrium interest rate.