show the open economy IS-LM equilibrium along with the interest parity relation line in a two-figure diagram. here th LM will be the one where the central bank adjusted money supply to keep the interest rate stable. what happens to output, the exchange rate, and the interest rate if the central bank tightens money supply after sensing that the economy is overheating? label all points and lines both old and new, and write the results in one or two sentences.
show the open economy IS-LM equilibrium along with the interest parity relation line in a two-figure...
Suppose you run the central bank in an open economy. What happens to the following variables of interest in response to the below events (analyze each event separately)? The president restricts the import of Chinese goods Use the standard open economy IS-LM model (not the Fleming-Mundell model). Also, assume direct effects of shifts are larger than indirect effects. a) IS – Direct Effect (increase / decrease / indeterminate / no change)? b) IS – Exchange Rate Effect (increase / decrease...
Suppose you run the central bank in an open economy. What happens to the following variables of interest in response to the below events (analyze each event separately)? The president restricts the import of Chinese goods Use the standard open economy IS-LM model (not the Fleming-Mundell model). Also, assume direct effects of shifts are larger than indirect effects. a) IS – Direct Effect (increase / decrease / indeterminate / no change)? b) IS – Exchange Rate Effect (increase / decrease...
Consider a small open economy with floating exchange rates. The LM curve of this economy is given as ??=20,000???200+(????), and the IS curve is given as ??=500?20,000??+????, where ????=600?300??. Suppose that ??=1,??=100, and the world interest rate (???) is 0.025. 1) Find out the equilibrium values of output (Y), exchange rate (e), and net export (NX) of this economy. ANSWERS = Y = 400, NX = 400, e = 2/3. 2) Suppose the central bank increases the money supply to...
Imagine that in a given economy the LM curve takes the form 20r +e, where ε denotes a shock to demand for money, which is known to the policy makers. How, do you think, a central bank, interested in ensuring that 100Y a) It should keep both money supply and the interest rate at constant levels all the time, b) The policy choice is irrelevant as monetary policy is neutral in the long run, c) It should keep the interest...
B3. Open Economy IS-LM-FE model: The behaviour of households and firms in an open economy is represented by the following equations: Full-employment outputY-1200 red consumption Cd = 350 + 0.5Y-200r : Desired investmentd 250-300r Government purchasesG 95 Net exports : NX = 100-01-05e Real exchange rate : 90. Assume that the real interest rate, r, does not deviate from the foreign interest rate and that the economy is initially in general equilibrium. ve the open-economy IS curve writing the real...
6) Using money supply-money demand and the interest rate parity relationship, show how the central bank can maintain fixed exchange rates in the face of changes in output. 7) Using the DD-AA model under fixed exchange rates, show the effects of monetary policy. What are the main results? 8) Using the DD-AA model under fixed exchange rates, show the effects of fiscal policy. What are the main results? 9) Using the DD-AA model under fixed exchange rates, show the effects...
Question 5: [15 marks A. In an open economy that is on a fixed exchange rate, show the short run effects on output and interest rate of a decrease in consumer confidence. To answer this question, draw the following four diagrams: 3 1. The goods market, 2. The money market, 3. The IS-LM curves, and 4. The interest parity condition. Clearly label the initial and new equilibrium points in each diagram. Provide brief explanations for the changes.
Looking for solutions, thanks a lot.
Problem #1 Consider an economy where the LM curve can be represented with M A+1500 50000(i-0.03) where A is a constant. Furthermore rate according to the following rule assume that the central bank in this economy sets the interest - n*) -) + Assume that the optimal inflation rate is equal to 0.02 and the equilibrium real interest rate, p, is equal to 0.01. Finally, let the potential output 0 Assume that initially the...
The following equations describe a small open economy. [Figures are in millions of dollars; interest rate (i) is in percent]. Assume that the price level is fixed. Goods Market Money Market C = 250 + 0.8YD L = 0.25Y – 62.5i YD = Y + TR – T Ms/P = 250 T = 100 + 0.25Y I = 300 – 50i G = 350; TR = 150 Goods market equilibrium condition: Y = C + I + G +...
Consider the Mundell-Fleming short-run model of a small open economy under floating exchange rates described by the following equations (1) through (7). Assume that there are free capital flows and that interest rate parity holds so that where 5 is the world interest rate. (1) Cu 400+0.8 (Y-D: (2) 1 = 850-60r (3) G = 1200; (4) T=1000 + 0.25Y: (5) NX = 600 - 200e : (6) Y=C+I+G+ NX; (7) (M/P )= 0.5Y -50rt. Equation (6) is the goods...