All answers should be in complete sentences. Draw graphs in Word or PowerPoint when necessary; handwritten graphs
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- All answers should be in complete sentences. Draw graphs in Word or PowerPoint when necessary; handwritten graphs will not be accepted.
- It is sometimes argued that the equality of real interest rates between a foreign economy and a domestic economy is a good measure of whether the two economies are “integrated”. This could lead to an argument for a currency union or a common currency such as the Euro. In two double-spaced pages, use the interest rate parity condition, to argue that equality of interest rates is not an accurate measure of “financial integration” between two countries. In this case is the real interest rate of the Domestic or Foreign economy and is the real exchange rate of the Domestic currency in terms of the Foreign.
- In an effort to stabilize exchange rates in the region, the members of the DR-CAFTA (the Dominican Republic, Central American Free Trade Agreement) which includes the Dominican Republic, Guatemala, Costa Rica, Nicaragua, el Salvador, and Honduras, agree to dollarize their economies. The US Dollar is chosen as the common currency as the majority of imports to DR-CAFTA countries come from the US, and the majority of exports from DR-CAFTA countries go to the US.
- Describe the costs of accepting such dollarization in a (page and a half) of reasoning.
- Suppose in the build up to the dollarization, Costa Rica must maintain a peg with the dollar for two years. In those two years, the US faces a recession, leading to a large monetary stimulus by the Federal Reserve. Using a monetary asset graph, demonstrate what will happen to the Costa Rican exchange rate with the dollar and describe the options and consequences Costa Rica faces in maintaining the peg. Put your graph on a full page.
- You run a firm that provides consulting services in the United States and Indonesia. Like all firms, the total value of your firm is determined by the value function where TR is total revenue, TC is total cost, E is the dollar to bhat exchange rate, and r is the return on capital. Suppose the current Indonesian government is voted out, and the incoming head of state announces a bold plan in conjunction with the central bank of Indonesia to severely decrease inflation in the bhat.
- Use a DD-AA model to analyze the effect on output and the exchange rate of the bhat. Graph the DD-AA model clearly on one page, then use a page and a half to explain your reasoning in the model. (Page and a half without the graph)
- In an effort to stabilize exchange rates in the region, the members of the DR-CAFTA (the Dominican Republic, Central American Free Trade Agreement) which includes the Dominican Republic, Guatemala, Costa Rica, Nicaragua, el Salvador, and Honduras, agree to dollarize their economies. The US Dollar is chosen as the common currency as the majority of imports to DR-CAFTA countries come from the US, and the majority of exports from DR-CAFTA countries go to the US.
- Suppose that you expect a larger effect on output than you do on the exchange rate. How would the output affect enter into the Value formula? Will your total revenue/total costs increase or decrease? What affect will the exchange rate have?
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rate of the Domestic or Foreign economy and is the real exchange rate of the Domestic currency in terms of the Foreign.
In an effort to stabilize exchange rates in the region, the members of the DR-CAFTA (the Dominican Republic, Central American Free Trade Agreement) which includes the Dominican Republic, Guatemala, Costa Rica, Nicaragua, el Salvador, and Honduras, agree to dollarize their economies. The US Dollar is chosen as the common currency as the majority of imports to DR-CAFTA countries come from the US, and the majority of exports from DR-CAFTA countries go to the US.
Related Book For
International Economics Theory and Policy
ISBN: 978-0273754206
9th Edition
Authors: Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz
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