Exam 20: Output,the Interest Rate,and the Exchange Rate

Suppose a country is pursuing a fixed exchange rate regime with imperfect capital mobility.The ability of that country to move its domestic interest rate while maintaining its exchange rate will depend on

For this question,assume that there is a simultaneous increase in government spending and monetary contraction.In a flexible exchange rate regime,we know with certainty that such a policy mix will cause which of the following?

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect an increase in foreign output (Y*)will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

Assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that the foreign interest rate falls.Discuss what policy makers must do to maintain the pegged exchange rate.Also discuss what effect this will have on domestic output and net exports.

Suppose there are two countries that are identical in every way with the following exception.Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible exchange rate regime.Suppose taxes are increased in both countries rises by the same amount.Given this information,we know that

The interest parity condition indicates that the domestic interest rate must be equal to

Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect a reduction in foreign output (Y*)will have on the domestic economy.In your graphs,clearly label all curves and equilibria.

Assume that the interest parity condition holds and that both the expected exchange rate and foreign interest rate are constant.Given this information,a reduction in the domestic interest rate will cause

Explain what effect each of the following events will have on the IS curve in a flexible exchange rate regime: (1)an increase in foreign output; (2)a reduction in the foreign interest rate; and (3)an increase in the domestic interest rate.

In practice,under the EMS,a member country

Under a "crawling peg" system,a country's exchange rate

In an open economy under flexible exchange rates,a reduction in consumer confidence that causes a reduction in consumption will cause which of the following?

Assume the interest parity condition holds and that initially i = i*.A reduction in the domestic interest rate will cause

As the economy moves up and to the right along the IS curve,which of the following will occur when exchange rates are flexible?

Under a fixed exchange rate regime,the central bank must act to keep

For a country pursuing a fixed exchange rate regime,what does the interest parity condition imply about domestic and foreign interest rates? Explain.

In the early 1990s,which nation took the lead in driving up European interest rates?

Suppose a country with a fixed exchange rate decides to reduce the price of its currency.This change in policy is called

Suppose policy makers are pursuing a policy to fix the exchange rate.In such a system with perfect capital mobility,an open market sale of domestic bonds by the domestic central bank will eventually result in

A common argument for fixed exchange rates is that they