P = λPd + (1-2) Pfle where Pd is the price of domestic goods, Pf is the price of foreign goods measured in the foreign currency, and e is the exchang rate. Thus, Ple is the price of foreign goods measured in the domestic currency. The parameter is the share of domestic goods in the price index P. Assume that the price of domestic goods Pa and the price of foreign goods measured in foreign currency are sticky in the short run. (Note: Since a higher exchange rate makes foreign goods cheaper, to the extent that people consume foreign goods (given by th fraction 1-2), the price level P that is relevant in the money market falls. The lower price level increases the supply of real money balances M/P. And to maintain equilibrium in the money market, income must rise, so money demand increases as well Hence, the LM curve is now upward sloping rather than vertical, as in the standard Mundell-Fleming model.) a. In the accompanying diagram, shift the IS curve, the LM curve, or both to show the effect of an expansionary fiscal policy under a floating exchange rate system. Exchange Rate, e LM IS

P = λPd + (1-2) Pfle where Pd is the price of domestic goods, Pf is the price of foreign goods measured in the foreign currency, and e is the exchang rate. Thus, Ple is the price of foreign goods measured in the domestic currency. The parameter is the share of domestic goods in the price index P. Assume that the price of domestic goods Pa and the price of foreign goods measured in foreign currency are sticky in the short run. (Note: Since a higher exchange rate makes foreign goods cheaper, to the extent that people consume foreign goods (given by th fraction 1-2), the price level P that is relevant in the money market falls. The lower price level increases the supply of real money balances M/P. And to maintain equilibrium in the money market, income must rise, so money demand increases as well Hence, the LM curve is now upward sloping rather than vertical, as in the standard Mundell-Fleming model.) a. In the accompanying diagram, shift the IS curve, the LM curve, or both to show the effect of an expansionary fiscal policy under a floating exchange rate system. Exchange Rate, e LM IS

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter29: Exchange Rates And International Capital Flows

Section: Chapter Questions

Problem 25CTQ: If a countrys currency is expected to appreciate in value, what would you think will be the impact...

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Suppose the real exchange rate is 10, the domestic price level is 8, and the foreign price level is 4. (i) What is the nominal exchange rate?e - enor-P Use the expression: rea! - PrOT ,where ereal is real exchange rate, enor is nominal exchange rate, P is domestic price level and Pro, is foreign price level (ii) Suppose the real exchange rate rises by 10%, the inflation rate in the domestic country is 6%, and the inflation rate in the foreign country is 4%. By what percentage does the nominal exchange rate change?
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Give typing answer with explanation and conclusion Consider the exchange rate between U.S. Dollar and Mexican Peso: USD/MXN. Initially, the supply curve for USD is 100 + eN bln dollars per week and the demand curve is 140 - eN bln dollars per week. There is a financial crisis in Mexico and the government fears that it may lead to capital outflows that would make the crisis even worse. They decide that if Mexican Peso depreciates by more than 20% the central bank will step in and fix the exchange rate. As the crisis unfolds the demand for the U.S. dollars increases to 142 - eN and the supply of dollars falls to 99 + eN. How should the central bank of Mexico react to this change?
What is happening to the U.S. real exchange rate ineach of the following situations? Explain.a. The U.S. nominal exchange rate is unchanged,but prices rise faster in the United States thanabroad.b. The U.S. nominal exchange rate is unchanged, butprices rise faster abroad than in the United States.c. The U.S. nominal exchange rate declines, andprices are unchanged in the United States andabroad.d. The U.S. nominal exchange rate declines, andprices rise faster abroad than in the United States.
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28. Assuming the exchange rate of the US$ to Mexican Peso (MXN) changes from US$1 MXN 20.44 to US$1 = MXN 22. The value of the US currency has _ in value and that %3D US exports to Mexico will appreciated ; increase depreciated ; increase depreciated ; decrease appreciated ; decrease
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Nov. 2015 exchange rate (per U.S. dollar) 0.7466 100.2 Nov. 2016 exchange rate (per U.S. dollar) 0.8009 114.61 Currency Euro Japanese yen Canadian dollar 1.0436 L1331 The table above shows the exchange rates between various currencies and the U.S. dolar. Between 2015 and 2016, the U.S. dollar against the Japanese yen. O depreciated; depreciated • appreciated; appreciated against the Euro and O appreciated; depreciated O depreciated; appreciated