Assume that policy makers are pursuing a fixed exchange rate regime. Now suppose that the foreign interest rate increases. 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
What will be an ideal response?
If i* increases, there will be pressure on the domestic currency to depreciate. To prevent this, the domestic central bank must raise its interest rate so that it rises by the same amount as i*. In this case, the LM curve will shift up so that the new equilibrium interest rate is equal to the now higher foreign interest rate. As i rises, E does not change. However, I will fall causing a reduction in demand and output. As Y falls, imports will fall and NX will increase.
You might also like to view...
An increase in foreign investment in Brazil's mining industry will increase the capital stock in Brazil. Holding labor and total factor productivity constant, continued increases in the capital stock will lead to
A) larger and larger increases in real GDP. B) smaller and smaller increases in real GDP. C) larger and larger decreases in real GDP. D) small increases, followed by small decreases, in real GDP.
Rational slave owners had economic incentive to adequately clothe, feed and care for their slaves
Indicate whether the statement is true or false
According to the demand-pull theory, what is responsible for inflation?
(A) Demand for goods and services exceeds existing supply. (B) Too much money is in circulation. (C) Producers raise prices to meet increased costs. (D) The economy is in a wage-price spiral.
Approximately how much of aggregate national income in the United States is spent on health care today?
A. 18 percent B. 45 percent C. 3 percent D. 34 percent