Answered: shock and its policy response on…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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An Asian economy runs a current account surplus and it is subjected to a surge in capital inflow. Assume its labour market clears, retaining full employment. The central bank fully offsets the financial inflow by raising official foreign reserves (R↑) sufficiently to prevent any change in the long maturity yield at home. a) Use diagrams to illustrate the effects of this shock and its policy response on overall economic performance. b) Use a sketch of the balance sheet of the central bank to aid in your use of the diagrams to assess the effects on the nominal money supply, MS, the price level, PY, and the nominal exchange rate, E. Briefly explain your results. c) Use your sketch of the central bank’s balance sheet to briefly discuss whether unattractive consequences could arise and how the central bank can “sterilise” the R↑ to avoid these.

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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