monetary policy

Using the IS-LM graph as well as the related equations and assuming an open economy with flexible exchange rates, illustrate graphically and explain carefully what effect an expansionary monetary policy will have on domestic interest rate, domestic output, and US exports, imports and trade balance. Clearly label all curves and clearly label the initial and final equilibria.

To control the money supply and prevent inflation, the Peoples Bank of China (PBC), which is confronted with a permanent current account and capital account surpluses, uses mostly two tools to sterilize the foreign currency inflow the variation of Required Reserved Ratio (which obliges the banks to make a deposit to the Central Bank corresponding to a percentage of the credits they grant) and the selling of Central Bank Bills . Elaborate and explain the pros and cons of each type of intervention

In the paper by Degrauwe, The Governance of a Fragile Eurozone by Paul De Grauwe, he argues that the fundamental problem in the Euro-zone today is that countries cannot borrow in their own currencies.  Explain what he means by this and what the consequences of this are for Euro-zone countries currently in crisis. DeGrauwe argues that countries in the Eurozone monetary union can face both liquidity and solvency crises – problems that could not occur in a country that issues its own currency, like the UK.  Explain. Refer to his comparison of Spain to the UK.

argues about the intervention of monetary policy as instruments to promote growth, sustainability and economic stability of a country. (Provide a detailed example).

Other things equal, an easy money policy will:     A)  reduce net exports.   B)  reduce GDP.   C)  increase interest rates.   D)  reduce the international value of the dollar.

See for Yourself Case Taking a Bite Out of Purchasing Power Parity with the Big Mac Index In 1986, Pam Woodall introduced the Big Mac Index as an illustration of purchasing power parity (PPP), which is the theory that currencies will go up or down in value to keep their purchasing power consistent across countries. Initially a lighthearted guide to whether currencies are at their "correct" level, the Big Mac Index has grown into a global standard and is now featured in many economic textbooks and dozens of academic studies. Many refer to this as "Burgernomics." The Big Mac Index is based on the theory of PPP that says, in the long run, exchange rates should move toward the rate that would equalize the prices of an identical basket of goods and services in any two countries. This means that the price of an item in one currency should be the same price in any other currency, adjusted for that currency's exchange rate. The Big Mac Index was never intended as a precise gauge of currency…

Suppose that at the initial equilibrium we know that the price level in the Eurozone is PE = 90.91, the dollar-euro expected exchange rate is E = 1.1, and that the interest rate in the Eurozone is 3%. $/e For the US variables take the same value as the ones specified in the beginning of the problem. Assume now that the Federal Reserve unexpectedly and permanently increases the nominal money supply from M* = 100 to M* = 105. Assume that the European Central Bank remains passive, making no changes to its monetary policy. Based on this information answer the following questions: 1. Find the new short-run equilibrium (interest rate, exchange rate, real money balances). Note that the shock is permanent, so expectations of the exchange rate should change. 2 2. Find the long-run equilibrium (interest rate, exchange rate, prices, real money balances). Is the exchange rate overshooting in the short run? Why? 3. Plot the dynamics of the variables of interest with respect to time. Denote T the…

Explain why permanent monetary expansion has a larger effect on output than temporary monetary expansion in case of a floating exchange rate regime in the short run.

The vertices of the triangle to the right show three features that policy makers in open economies would prefer their monetary system to achieve. Assuming that each of the three policy regime labels along the triangle's edges is consistent with the two goals that it lies between in the diagram, Policy regime 3 best represents Policy regime 1 Monetary policy autonomy Exchange rate stability Policy regime 2 Policy regime 3 Freedom of financial flows ⒸO