2) For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. Note: In this question (unlike in the Work It Out question), assume that the government allows the exchange rate to float but also responds by using monetary policy to stabilize output. Hint: In each case, make use of the goods market equilibrium condition to understand what happens to consumption, investment, and the trade balance in the shift from the old to the new equilibrium. a. Foreign output increases. b. Investors expect an appreciation of the home currency in the future. c. The home money supply decreases. d. Government spending at home decreases. 3) Repeat the previous question, assuming the central bank responds in order to maintain a fixed exchange rate. In which case or cases will the government response be the same as in the previous question? a) Foreign output increases. b) Investors expect a home appreciation. c) Money supply decreases. d) Government spending decreases.

2) For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. Note: In this question (unlike in the Work It Out question), assume that the government allows the exchange rate to float but also responds by using monetary policy to stabilize output. Hint: In each case, make use of the goods market equilibrium condition to understand what happens to consumption, investment, and the trade balance in the shift from the old to the new equilibrium. a. Foreign output increases. b. Investors expect an appreciation of the home currency in the future. c. The home money supply decreases. d. Government spending at home decreases. 3) Repeat the previous question, assuming the central bank responds in order to maintain a fixed exchange rate. In which case or cases will the government response be the same as in the previous question? a) Foreign output increases. b) Investors expect a home appreciation. c) Money supply decreases. d) Government spending decreases.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter6: Managing In The Global Economy

Section: Chapter Questions

Problem 4E

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2. You are working as the chief economist for the Ministry of Economy in Peru. For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, TB. Assume the government allows the exchange rate to float and makes no policy response. a. Peru's main trading partner, China, enters into a recession. China's output decreases. b. Investors expect a depreciation of the Sol, the Peruvian currency. c. The money supply in Peru increases. d. Peruvian government increases government spending.
For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. Assume the government allows the exchange rate to float and makes no policy response. d. Government spending increases For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. Note: Assume the government responds by using monetary policy to stabilize output and assume the exchange rate is floating. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. d. Government spending increases. Please illustruate the IS-LM model and explain in detail. I want to understand for the upcomming test. Thank you in advanced.
For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. Note: Assume the government responds by using monetary policy to stabilize output and assume the exchange rate is floating. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. a. Foreign output decreases. b. Investors expect a depreciation of the home currency. c. The money supply increases. d. Government spending increases. Please illustruate the IS-LM model and explain in detail. I want to understand for the upcomming test
Exercise 3 For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. Note: Assume the government responds by using monetary policy to stabilize output, unlike Exercise 2, and assume the exchange rate is floating. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. For your graphical illustration, use A to denote initial equilibrium, B for the equilibrium in Exercise 2, and C for the equilibrium in Exercise 3. (a) Foreign output decreases. (b) Investors expect a depreciation of the Home currency. (c) The money supply increases.
For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. Assume floating exchange rate and the government uses monetary policy to help stabilize output. a. Foreign output increases. b. Investors expect an appreciation of the home currency in the future. c. The home money supply decreases. d. Domestic tax decreases. 2. Now repeat your analysis in #1 above but this time assume the central bank responds to the shock in order to maintain a fixed exchange rate.
c. Consider a period when, prior to euro entry, the central bank of Lithuania maintained an exchange rate band relative to the euro-at the time this was a prerequisite for joining the Eurozone. The rules said that Lithuania had to keep its exchange rate within ±15% of the central parity of 3.4528 litas per euro. Compute the exchange rate values corresponding to the upper and lower edges of this band. Suppose PPP holds. Assuming Eurozone inflation was 2% per year and inflation in Lithuania was 6%, compute the PPP-implied rate of depreciation of the lita. Could Lithuania maintain the band requirement? For how long? Does your answer depend on where in the band the exchange rate currently sits? A primary objective of the European Central Bank is price stability (low inflation) in the current and future Eurozone. Is an exchange rate band a necessary or sufficient condition for the attainment of this objective?
4. Use the Mundell-Fleming model to predict what would happen to real GDP, the exchange rate, and net exports under both floating and fixed exchange rate regimes in response to each of the following shocks. Your answers should be in the form of fully-labeled graphs, where any curve shifts and new equilibrium are clearly shown. (a) Consumer confidence in the economy is falling, so consumers start to spend less. (b) Toyota designed a line of stylish new cars, making consumers prefer foreign cars over domestic cars. Banks double the number of ATMs (automatic teller machines) around the economy, reducing the demand for money.
Consider the COVID-19 pandemic and the ongoing financial developments for building your arguments for the following question. a. Explain the short-run and long-run effects of the adjustment of the dollar/euro exchange rate following a permanent increase in the U.S. money supply and show those effects on the related diagrams. Suppose the economy starts with all variables at their long-run levels and that output remains constant as the economy adjusts to the money supply change. b.Explain the exchange rate overshooting with the help of the diagrams that you drew for part a. Why is the exchange rate overshooting an important phenomenon? What does it help to explain?
2. Based on the IS-LM-PC model for a closed economy studied in class, which of the following statements is correct? a) In the medium run monetary policy can only be used to control inflation, but it will not affect production. b) In the medium run, fiscal policy can only help to increase or decrease interest rates, but it will not affect production. c) Both monetary and fiscal policy can't be effectively uscd to increase production in the short run. d) All of the above.
Suppose the Federal Reserve enacts contractionary monetary policy to offset covid-era quantitative easing and avoid long-run inflationary pressure. Use our simultaneous equilibrium model to show the effects of such a policy action on US interest rates as well as the value of the dollar relative to the Japanese Yen.
2. Consider a country operating under fixed exchange rates, with aggregate demand and aggregate supply given by equa- tions (21.1) and (21.2). AD: Y = Y AS:P = P(1 + m) F(1 - -) Assume that the economy is initially in medium-run equi- librium, with a constant price level and output equal to the naturallevel of output. Foreign output, the foreign price level, and the foreign interest rate are fixed throughout the problem. Assume that expected (domestic) inflation remains constant throughout the problem. a. Draw an AD-AS diagram for this economy. b. Now suppose there is an increase in government spend- ing. Show the effects on the AD-AS diagram in the short run and the medium run. How do output and the price level change in the medium run? c. What happens to consumption in the medium run? d. What happens to the real exchange rate in the medium run? [Hint: Consider the effect on the price level you iden- ti fied in part (b).] What happens to net exports in the me- dium run? e. Given that…
Question 10 d Anwser only question d please thank you Assume that there is a free-floating exchange rate. Will the following cause sterling toappreciate or depreciate relative to other currencies? In each case, you should considerwhether there is a shift in the demand or supply curves of sterling (or both) and whichway the curve(s) shift(s). You may assume that the impacts are ceteris paribus, that is,everything else remains the same. Illustrate your answers and give a short explanation interms of currency supply and demand.(a) UK imports increase. (b) UK interest rates rise relative to those abroad. (c) The UK experiences lower inflation than other countries, but with no change in interestrates. (d) Forex speculators believe that the Pound sterling will depreciate.