Assume that Mexico (a small open economy in a recession seeking to promote economic growth through...
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Assume that Mexico (a small open economy in a recession seeking to promote economic growth through trade) is now adopting a fixed exchange rate system (e.g. peg the peso to the US dollar). [25 points] B1. What would you propose as a domestic policy to promote income through trade? Just state it (you will explain below). Would the policy temporarily lead to be greater or less than r*? Briefly explain. B2. What happens to the NCF between Mexico and the US? Is it a NCI or NCO? Write down the NCF equation and explain how the two parts in that equation will change. NCF = B3. How would the NCI or NCO affect the market exchange rate relative to the fixed exchange rate ()? Explain the changes in the demand and the supply of Pesos in the FEM. B4. Given that e differs from e, explain the arbitrage that will ensue in returning the market exchange rate (e) back to the fixed exchange rate level. Specifically, explain how the actions of the arbitrageurs and the Mexican Central Bank would alter the money supply and bring back e to e. B5. Illustrate your policy choice on an IS*/LM* graph. Show the increased NX and Y on your graph. LM* H e IS* Y Assume that Mexico (a small open economy in a recession seeking to promote economic growth through trade) is now adopting a fixed exchange rate system (e.g. peg the peso to the US dollar). [25 points] B1. What would you propose as a domestic policy to promote income through trade? Just state it (you will explain below). Would the policy temporarily lead to be greater or less than r*? Briefly explain. B2. What happens to the NCF between Mexico and the US? Is it a NCI or NCO? Write down the NCF equation and explain how the two parts in that equation will change. NCF = B3. How would the NCI or NCO affect the market exchange rate relative to the fixed exchange rate ()? Explain the changes in the demand and the supply of Pesos in the FEM. B4. Given that e differs from e, explain the arbitrage that will ensue in returning the market exchange rate (e) back to the fixed exchange rate level. Specifically, explain how the actions of the arbitrageurs and the Mexican Central Bank would alter the money supply and bring back e to e. B5. Illustrate your policy choice on an IS*/LM* graph. Show the increased NX and Y on your graph. LM* H e IS* Y
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Macroeconomics Principles, Applications, and Tools
ISBN: 978-0132555234
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez
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