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For Appendix readers only. For the preceding example, set up the equivalent of Figure 16.4. Next, show the actions required on the part of the Mexican monetary authority in response to a decrease in income in Mexico, a decrease in income in the United States, and a contractionary
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- Apply the monetarist model of exchange rate and assume that a = 0.5 and B = 0.6. Explain how the $/EUR ratio will evolve once there is an increase in nominal money supply by 10% in Canibalia and by 5% in Spain, while GDP grows at 2% per year and 3% per year respectively (ceteris paribus). What should be the growth rate of national money supply if we want the nominal exchange rate to be constant? a. If we want the nominal exchange rate to be constant then the growth rate of national money supply should equal 5.5% b. If we want the nominal exchange rate to be constant then the growth rate of national money supply should equal 4.5% O c. Nominal exchange rate $/EUR will increase by 4.5% O d. Nominal exchange rate $/EUR will increase by 5.5%Using information from problems 3 and 4, suppose that the central bank of Mexico has 200 bln dollars of foreign reserves just before the financial crisis began. If the central bank wants to keep the exchange rate at the level described in problem 4, it can do so for _____ weeks before it runs out of reserves (provided supply and demand curves do not change). Question 3 and 4 attached for your information:)Explain how the results of monetary policy will change when price and wage variability are included in the fixed price Mundell-Fleming model in the example of a floating exchange rate regime (perfect capital mobility).
- Which government institution can create the most money? What tools does the Fed have to regulate money creation in the economy? What is the long-run impact of a larger money supply on inflation? What can be the impact of that money creation on the exchange rate? Support your answer using the Quantitative Theory of Money formula MV = P Q; to analyze the effect of money creation on the exchange rate use the Purchasing Power Parity Model, Exchange Rate of Currency X to Y = Cost of good in currency X/Cost of good in currency YUsing 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).Suppose that Germany (country a) and France (country b) do not have foreign currency controls in effect. The total demand for money is always 2,000 goods in Germany and 1,000 goods in France. The fiat money supplies are 100 marks in Germany and 300 francs in France. A. Find the value of each country's money if the exchange rate et is 3. Do the same if et =1. Is one exchange rate more likely than the other? Explain. B. Suppose the exchange rate is 3 and France triples its fiat money stock, whereas Germany prints no new money. How many goods will France gain in seigniorge? What fraction of this seigniorge comes from German citizens?
- 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…
