1. (24 points) You have been hired as a macroeconomic advisor for Newland, a small open...

Transcribed Image Text:

1. (24 points) You have been hired as a macroeconomic advisor for Newland, a small open economy in Latin America. Its main export destination is the United States. Your job is to recommend an appropriate mix of monetary, fiscal, macroprudential, and structural policies. Justify your policy recommendations. Illustrate with AA-DD charts or other charts where appropriate. In your answer, always respect the exchange rate regime chosen by the country (meaning your recommendation cannot be simply to change the exchange rate regime.) Page 5 of 11 (a) (6 points) At first, Newland has a fixed exchange rate regime pegged to USD. It has a recession with high unemployment and low inflation. It has no fiscal debt and has been running fiscal surpluses for the past 10 years. (b) (6 points) One year later, Newland has decided to abandon the peg to the US dollar and it now has a flexible exchange rate regime. It is experiencing a recession with high unemployment and low inflation. Fiscal debt is high. (c) (6 points) Few years later, Newland is facing low inflation and full employment. The housing market is clearly overheating. (d) (6 points) Another few years later, Newland is facing high inflation due to high oil prices, but the economy is experiencing a recession with high unemployment. Financial stability seems under stress and banks' balance sheets are in poor shape and they are deleveraging and not lending. Nevertheless, the fiscal position is good. 1. (24 points) You have been hired as a macroeconomic advisor for Newland, a small open economy in Latin America. Its main export destination is the United States. Your job is to recommend an appropriate mix of monetary, fiscal, macroprudential, and structural policies. Justify your policy recommendations. Illustrate with AA-DD charts or other charts where appropriate. In your answer, always respect the exchange rate regime chosen by the country (meaning your recommendation cannot be simply to change the exchange rate regime.) Page 5 of 11 (a) (6 points) At first, Newland has a fixed exchange rate regime pegged to USD. It has a recession with high unemployment and low inflation. It has no fiscal debt and has been running fiscal surpluses for the past 10 years. (b) (6 points) One year later, Newland has decided to abandon the peg to the US dollar and it now has a flexible exchange rate regime. It is experiencing a recession with high unemployment and low inflation. Fiscal debt is high. (c) (6 points) Few years later, Newland is facing low inflation and full employment. The housing market is clearly overheating. (d) (6 points) Another few years later, Newland is facing high inflation due to high oil prices, but the economy is experiencing a recession with high unemployment. Financial stability seems under stress and banks' balance sheets are in poor shape and they are deleveraging and not lending. Nevertheless, the fiscal position is good.

Answer rating: 100% (QA)

A Suppose New Zealand has a fixed exchange rate regarding US dollar it has a recession with high une... View the full answer