In a context of perfect capital mobility, consider a simplified small open economy (for this economy...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
In a context of perfect capital mobility, consider a simplified small open economy (for this economy we consider foreign GDP (Y), foreign price level (PF), and the interest rate on international financial markets (r) as exogenous), modeled with the following equations: C = 0.8(Y-T) T = T* = constant |=-10,000r + 3,500 G = G* = constant M = 0.2Y + 1,000e X = 0.2YF -1,000e (1) (2) (3) (4) (5) (6) (7) (8) (9) P = In particular: M: imports YF: foreign income (or GDP) MP/P = 0.4Y-10,000r + 500 M M* constant X: exports r: foreign real interest rate e: exchange rate (defined as the quantity of foreign currency per 1 unit of national currency) 1)Define the (IS) and (LM) curves, and then establish their equations. 2) Given an exchange rate fixed at e = 2 and YF = 40,000, determine the internal equilibrium (hint: internal equilibrium is defined by the IS and LM curves) of this economy for the following values of variables: G*= 5,000, T* = 5,000, M* = 8,000. 3) Compute all endogenous variables of the model at the internal equilibrium. Then, compute the value of net exports. Moreover, if the foreign interest rate is r = 5%, explain if the internal equilibrium income provides an external equilibrium (hint: external equilibrium is defined by the IS and LM curves, and by the international financial market (IFM) relationship, which corresponds in this model to: (IFM): r = rf). Finally, draw the curves (IS), (LM), and (IFM) in the (Y,r) plan. We study the effects of external shocks on this economy's equilibrium by considering two cases: -case (i): The economy has a fixed exchange rate regime; - case (ii) the economy has a floating exchange rate regime. For each shock (see questions 4. and 5. below), and for each type of exchange rate regime (i) and (ii), you will first analyze the initial effect of the external shock on the internal equilibrium and on the external equilibrium. Next, by presenting the dynamics of the curves (IS), (LM), and (IFM), you will explain the adjustments that follow an external disequilibrium. You will then compute all endogenous variables in the final equilibrium, which is reached when internal and external equilibria correspond. 4) Shock n 1: the foreign interest rate is reduced to r = 296. 5) Shock n 2: foreign income increases by 5%. In a context of perfect capital mobility, consider a simplified small open economy (for this economy we consider foreign GDP (Y), foreign price level (PF), and the interest rate on international financial markets (r) as exogenous), modeled with the following equations: C = 0.8(Y-T) T = T* = constant |=-10,000r + 3,500 G = G* = constant M = 0.2Y + 1,000e X = 0.2YF -1,000e (1) (2) (3) (4) (5) (6) (7) (8) (9) P = In particular: M: imports YF: foreign income (or GDP) MP/P = 0.4Y-10,000r + 500 M M* constant X: exports r: foreign real interest rate e: exchange rate (defined as the quantity of foreign currency per 1 unit of national currency) 1)Define the (IS) and (LM) curves, and then establish their equations. 2) Given an exchange rate fixed at e = 2 and YF = 40,000, determine the internal equilibrium (hint: internal equilibrium is defined by the IS and LM curves) of this economy for the following values of variables: G*= 5,000, T* = 5,000, M* = 8,000. 3) Compute all endogenous variables of the model at the internal equilibrium. Then, compute the value of net exports. Moreover, if the foreign interest rate is r = 5%, explain if the internal equilibrium income provides an external equilibrium (hint: external equilibrium is defined by the IS and LM curves, and by the international financial market (IFM) relationship, which corresponds in this model to: (IFM): r = rf). Finally, draw the curves (IS), (LM), and (IFM) in the (Y,r) plan. We study the effects of external shocks on this economy's equilibrium by considering two cases: -case (i): The economy has a fixed exchange rate regime; - case (ii) the economy has a floating exchange rate regime. For each shock (see questions 4. and 5. below), and for each type of exchange rate regime (i) and (ii), you will first analyze the initial effect of the external shock on the internal equilibrium and on the external equilibrium. Next, by presenting the dynamics of the curves (IS), (LM), and (IFM), you will explain the adjustments that follow an external disequilibrium. You will then compute all endogenous variables in the final equilibrium, which is reached when internal and external equilibria correspond. 4) Shock n 1: the foreign interest rate is reduced to r = 296. 5) Shock n 2: foreign income increases by 5%.
Expert Answer:
Answer rating: 100% (QA)
To solve this problem we need to derive the IS curve LM curve and the international financial market IFM relationship based on the given equations The... View the full answer
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
Posted Date:
Students also viewed these economics questions
-
1. (20 points) In the right figure, the yellow fluid is olive oil and the blue fluid is water. Specific gravity of olive oil is 0.92 and the atmospheric pressure is 101325 Pa. What is pressure at the...
-
When the wavelength of radiation falling on a metal is changed from 500 nm to 200 nm, the maximum kinetic energy of the photoelectrons becomes three times larger. The work function of the metal is...
-
Let X, Y, Z have joint density fX,Y,Z (x,y,z) = 6, for 0 < x < y < z < l and fX,Y,Z (x,y,z) = 0 otherwise. a. Are X and Y and Z independent? b. Find the density fX(x) of X. c. Find the density fY(y)...
-
Suppose you bought 1 share of Wal-Mart (WMT) one year ago today at $50. Over the last year, you received $5 in dividends and, at the end of the year, the stock sells for $60. What was the holding...
-
The time-dependent axial stress, \(\sigma_{x}(t)\) and the time-dependent circumferential stress, \(\sigma_{y}(t)\) in the wall of the filament-wound, thin-walled composite pressure vessel shown in...
-
Rose Distributing Company completed the following merchandising transactions in the month of April. At the beginning of April, the ledger of Rose showed Cash of $9,000 and Owners Capital of $9,000....
-
Describe a situation where you were responsible for getting others to make a change. What role did you play and what actions did you take? What was the outcome? If you had to do it again, would you...
-
Solve the given differential equation. y*dx + (x + 3ry + 4y)dy = 0 O (t 2y)ln y = C + y O (x + 2y)ln y = C +y O (x 2y)ln y = C y O (x + 2y)ln y = C y
-
If the price of Lowe's preference shares is R30 and the company pays a dividend of R2, what is the discount rate/required rate of return used by the company?
-
delete : delete a reservation for during time for day quit: server updates file reservations.txt and quits The server should implement checks to ensure that requests are sensible. For example, a...
-
Determine the price of a five-year 5% coupon treasury bond, sold to yield 6%. Assume a flat yield curve. FV = 1000 N = 5 PMT = 50 I/Y=6 PV=2 2. You buy the treasury bond for the price calculated...
-
3.3. The private company has only two components of debt. First, the target company has a 3-year bank loan with a face value of 30M and annual interest expense rate of 6%. Second, the target company...
-
stock 1 - HP Inc. (HPQ) Current Price -$ 30.00 Bought 6Months ago - $31.53 Stock 2 - Logitech International (LOGI) Current Price - $54.84 Bought 6 months ago - 51.14 Select two stocks. Find the...
-
Design a simple full-screen editor on a video display terminal. The editor allows text to be inserted, deleted, and modified. Sections of text can be cut from one part of the file and pasted to...
-
Read the case study Richter: Information Technology at Hungarys Largest Pharma and answer the following question: How does the organization ensure the accuracy of the data it stores?
-
In Example 12.1, we introduced the Hong-Ou-Mandel interferometer and presented an analysis of thinking about the photons produced by the laser as classical electromagnetic waves. In this exercise, we...
-
The quaternions are three quantities i, j, and k such that, along with the real number 1, they form the basis of a four-dimensional space over the real numbers. The objects i, j, and k have...
-
We had stated in this chapter that the general Rnyi entropies do not satisfy subadditivity; only the von Neumann entropy does. In Example 12.2 , we constructed an explicit counterexample for the Rnyi...
Study smarter with the SolutionInn App