It is possible to assert that the exchange rate is endogenous in the equation system nx = c1 + c2 y + c2 ex + u, where nx is net exports, y is gross domestic product, and ex is real exchange rate. Defend this assertion.
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It is possible to assert that the exchange rate is endogenous in the equation system nx = c1 + c2 y + c2 ex + u, where nx is net exports, y is gross domestic product, and ex is real exchange rate. Defend this assertion.
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- Consider the following open economy. The real exchange rate is fixed and equal to one. Consumption,investment, government spending, and taxes are given by:C = 8 + 0.6(Y - T), I = G = T = 0.Imports/ exports are given by:Q = 0.4Y, X = 0.4Y*,where an asterisk denotes a foreign variable.Question Following a), if the domestic government increases spending by 6 units (i.e., G increasesfrom 0 to 6), the equilibrium output in the domestic country will increase by unitsand the trade balance will (increase/decrease) by units. Question c): Assume the foreign economy has the same equations as the domestic economy. Bothgovernments consider the impact of the other country on the domestic economy. If G=0, then theequilibrium output in both countries is and the trade balance is Following c), if the domestic government increases spending by 6 units as in b) and G=0in the foreign country, the equilibrium output in the domestic country increases by units, and the trade balance in equilibrium is…Consider the following open economy. The real exchange rate is fixed and equal to one. Consumption,investment, government spending, and taxes are given by:C = 8 + 0.6(Y - T), I = G = T = 0.Imports/ exports are given by:Q = 0.4Y, X = 0.4Y*,where an asterisk denotes a foreign variable. if the domestic government increases spending by 6 units as in b) and G=0in the foreign country, the equilibrium output in the domestic country increases by units, and the trade balance in equilibrium is Now, suppose that the two countries coordinate in their fiscal policy. Both countries set atarget level of output of 30 and agree to increase G at the same amount. The common increase in Gnecessary to achieve the target output is and the trade balance isAn exchange rate is the domestic price to purchase one unit of a foreign currency. For example, how much does it cost in Canadian dollars to buy one US dollar? There are various economic theories to predict exchange rates. The simplest theory is known as the Law of One Price or also known as Absolute Purchasing Power Parity (PPP). Use absolute PPP and the price of a Big Mac in different countries to complete the table below and to predict whether the local currency is over or undervalued compared to the US dollar. Country USA Canada Saudi Arabia Brazil Italy Source: The Economist Big Mac Price in Local Currency $4.62 $5.54 SR 10 R$ 12 €3.75 Current Market Exchange Rate e 1.10 3.75 2.27 0.74 Exchange Rate Predicted by PPP and Big Mac ê According to the table above, an arbitrageur in Brazil could make money by If the Big Mac Index were accurate for other tradeable goods and services, Brazil's AD curve would O Local Currency should... the US. 수 + 8°C. Clou
- Consider the following open economy. The real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by:C = 8 + 0.6(Y - T), I = G = T = 0.Imports/ exports are given by:Q = 0.4Y, X = 0.4Y*,where an asterisk denotes a foreign variable a. If the domestic government increases spending by 6 units (i.e., G increases from 0 to 6), the equilibrium output in the domestic country will increase by ____. and the trade balance will ________ (increase/decrease) by _____. b. Assume the foreign economy has the same equations as the domestic economy. Both governments consider the impact of the other country on the domestic economy. If the domestic government increases spending by 6 units as in b) and G=0 in the foreign country, the equilibrium output in the domestic country increases by _______ units, and the trade balance in equilibrium is _____. c. Please compare answer a) and b) regarding the equilibrium output and explain the difference.Consider a small open economy with the following information: C = 50 + 0.80 (Y – T) I= 200 – 2,000r NX = 100 – 25ɛ (M/P)d = Y – 4, 000r G= 300 T= 300 M = 4,000 P= 4 r* = 5% a. Estimate the equilibrium exchange rate, level of income, and net exports in the economy.If the foreign price level increases by 3%, and the domestic price level increases by 20%, by what percent should the exchange rate of domestic currency per foreign currency increase, given relative PPP holds? Your answer should be an integer with a % sign assumed to follow (e.g., if you wish to say 48 percent, write 48). The percent increase in the exchange rate should be
- Which of the following statements is true? An advantage of a fixed exchange rate system is that governments are required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries. A disadvantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries. A disadvantage of a fixed exchange rate system is that governments are required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.Consider the following equation: NX(ɛ) = S - I(r*) This equation is used to draw the diagram illustrating the foreign exchange market, where there is a negative relationship between NX and ɛ; and S, - I(r*) is perfectly inelastic. Here NX is net exports, ɛ is the exchange rate, S represents the level of savings in the economy, I represent the level of investment in the economy, and r is the interest rate. a. Use a carefully labeled diagram to illustrate the effect of a contractionary fiscal policy at home on savings, interest rate, net capital outflow and the exchange rate b. Use a carefully labeled diagram to illustrate the effect of a contractionary fiscal policy abroad on savings, interest rate, net capital outflow and the exchange rateAssume that in 2010, Country A had an exchange rate of 0.770.77 units of national currency (UNC) per U.S. dollar (USD). By 2015, Country A's budget deficit increased, and Country A decided to issue bonds to finance the deficit. As a result, the exchange rate changed by UNC0.06UNC0.06. Calculate the 2015 exchange rate.
- The equilibrium interest rate determined in the IS-LM model will give rise to an implied exchange rate in an open economy. Which one of the following statements regarding this relationship is INCORRECT? (a) The interest parity condition implies that there is a positive relationship between the domestic interest rate and the exchange rate; (b) An increase in the interest rate will cause an upward movement along the IS curve and the exchange rate will appreciate; (c) A decrease in the interest rate will result in an upward shift of the LM curve and the exchange rate will appreciate; (d) A decrease in the interest rate will result in a downward shift of the LM curve and the exchange rate will depreciate.Consider the following open economy. The real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by:C = 8 + 0.6(Y - T), I = G = T = 0.Imports/ exports are given by:Q = 0.4Y, X = 0.4Y*,where an asterisk denotes a foreign variable a. Suppose that the domestic country takes foreign income Y* as given. The equilibrium output in the domestic economy is? b. Following a), if the domestic government increases spending by 6 units (i.e., G increases from 0 to 6), the equilibrium output in the domestic country will increase by ____. and the trade balance will ________ (increase/decrease) by _____. c. Assume the foreign economy has the same equations as the domestic economy. Both governments consider the impact of the other country on the domestic economy. If G=0, then the equilibrium output in both countries is ______ and the trade balance is ______. d. Following c), if the domestic government increases spending by 6 units as in b) and G=0…True/False The exchange rate between two countries can be thought of as unrelated to any economic variables.