Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 20, Problem 7E
To determine
Derivation of IS curve.
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Imports and short-run output: In addition to depending on the exchange rate (and therefore on the interest rate), imports may depend on short-run output: when the economy is booming, consumers tend to demand more foreign goods. To incorporate this result into our short-run model, suppose the new net exports equation is Derive the IS curve with this new equation, and explain how it differs from the standard IS curve in the short-run model.
In your macroeconomic lectures you are often told that exchange rates and interest rates are important for macroeconomic decision-making.
How does an increase in Japan’s government budget deficit affect each of the following?
The real interest rate in the short run in Japan. Explain.
Private domestic investment in plant and equipment in Japan.
Draw a correctly labeled graph of the foreign exchange market for the euro, and show the effect of the change in the real interest rate in Japan from part (a)(i) on each of the following.
Supply of euros. Explain.
Yen price of the euro
To reverse the change in the yen price of the euro identified in part (b) (ii), should the European Central Bank buy or sell euros in the foreign exchang market? Explain.
Consider the following equation:
NX(ɛ) = S - I(r*)
This equation is used to draw the diagram illustrating the foreign exchange market, where there is
a negative relationship between NX and ɛ; and S, - I(r*) is perfectly inelastic.
Here NX is net exports, ɛ is the exchange rate, S represents the level of savings in the economy, I
represent the level of investment in the economy, and r is the interest rate.
a. Use a carefully labeled diagram to illustrate the effect of a contractionary fiscal policy at
home on savings, interest rate, net capital outflow and the exchange rate
b. Use a carefully labeled diagram to illustrate the effect of a contractionary fiscal policy
abroad on savings, interest rate, net capital outflow and the exchange rate
Chapter 20 Solutions
Macroeconomics (Fourth Edition)
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