Consider two small, open economies, Home and Foreign. Use the asset approach to the exchange rate...
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Consider two small, open economies, Home and Foreign. Use the asset approach to the exchange rate to answer the following questions, each part of the question is NOT related to other parts. a) Recently, several regional commercial banks collapse in Foreign, and the collapses trigger fears in the banking and financial markets in both Home and Foreign. In attempt to calm the markets, both countries' central banks increase the required reserve ratios in their respective banking system temporarily? What happens to the DC/FC exchange rate and the domestic real money balance in the short run? Explain with the support of ONE foreign exchange market diagram (only the first diagram will be graded). (15 points). b) Suppose Foreign experiences a permanent improvement in payment technology such that the need to hold cash to facilitate transactions drops, what happens to the DC/FC exchange rate in both short run and long run? Explain with the aid of ONE foreign exchange market diagram (only the first diagram will be graded). (10 points). Note: DO NOT write "let Foreign be the home country and its currency be DC" and start your analysis; otherwise, you will receive a grade of ZERO for the whole question. Compare your answer to initial long-run equilibrium. Consider two small, open economies, Home and Foreign. Use the asset approach to the exchange rate to answer the following questions, each part of the question is NOT related to other parts. a) Recently, several regional commercial banks collapse in Foreign, and the collapses trigger fears in the banking and financial markets in both Home and Foreign. In attempt to calm the markets, both countries' central banks increase the required reserve ratios in their respective banking system temporarily? What happens to the DC/FC exchange rate and the domestic real money balance in the short run? Explain with the support of ONE foreign exchange market diagram (only the first diagram will be graded). (15 points). b) Suppose Foreign experiences a permanent improvement in payment technology such that the need to hold cash to facilitate transactions drops, what happens to the DC/FC exchange rate in both short run and long run? Explain with the aid of ONE foreign exchange market diagram (only the first diagram will be graded). (10 points). Note: DO NOT write "let Foreign be the home country and its currency be DC" and start your analysis; otherwise, you will receive a grade of ZERO for the whole question. Compare your answer to initial long-run equilibrium.
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a When both home and foreign central banks increase the required reserve ratio in their respective banking systems It has impact on the foreign exchan... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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