Interest rate on international financial markets

Assignment Help Macroeconomics
Reference no: EM131086611

In a context of perfect capital mobility, consider a simplified small open economy (for this economy we consider foreign GDP (YF), foreign price level (PF), and the interest rate on international financial markets (rF) as exogenous), modeled with the following equations:

(1) C = 0.8(Y - T )

(2) T = T* = constant

(3) I = -10,000r + 3,500

(4) G = G* = constant

(5) M = 0.2Y + 1,000e

(6) X = 0.2YF - 1,000e

(7) MD/P = 0.4Y - 10,000r + 500

(8) MS = M* = constant

(9) P =  

In particular:

M: imports                                          X: exports

YF: foreign income (or GDP)             rF: 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 rF = 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 no 1: the foreign interest rate is reduced to rF = 2%.

5) Shock no 2: foreign income increases by 5%.

Reference no: EM131086611

Questions Cloud

Distribution and to consumption : What is a financial and social system of how resources flow through society, from production, to distribution and to consumption?
Empirical consumer demand : Briefly explain why empirical consumer demand studies such as Patrick McCarthy's study of automobile demand are relevant to managers?
List of key relevant issues related to the ignition recall : List of key relevant issues related to the ignition recall, including near-term and long-term negative impact. Discussion of findings related to current or past service / recall practices leading to the current situation.
Compare the refractive index data for simple and fractional : For Hickman still or for test tube microscale distillations, compare the refractive index data for simple and fractional distillations. Do the data suggest which distillation procedure is more efficient? Briefly explain.
Interest rate on international financial markets : In a context of perfect capital mobility, consider a simplified small open economy (for this economy we consider foreign GDP (YF), foreign price level (PF), and the interest rate on international financial markets (rF) as exogenous), modeled with the..
Derive the equations of the curves : 1)Briefly explain equations (1)-(10). Then, derive the equations of the curves (IS) and (LM). Assume in the following that: G* = 360 and M* = 1500.
Evaluate and critique the existing operation and management : Evaluate and critique the existing operation and the management of J. Galt Lock. How applicable is JIT to a situation like this? Would converting from a functional layout to a cellular layout facilitate the implementation of JIT?
Percentage of the single payment cost : 1. Insurance that costs £440 per annum if paid in a single payment, costs £38.50 per month if paid in 12 equal monthly installments. Calculate: 2. the additional annual cost if paying by monthly installments 3. the additional annual cost as a perce..
Did you develop your wbs top-down or bottom up approach : Does your WBS include everything in your team's charter and all deliverables (promised deliverables to the client organization customer)? Does your WBS address tasks that were not discussed in the Project Charter? If so, what are they and how did..

Reviews

Write a Review

 

Macroeconomics Questions & Answers

  What is the something else that desoto argues is necessary

What is the something else that DeSoto argues is necessary for a capitalist economy to produce wealth? Choose and explain one example or counter example used by DeSoto to make his case.

  Limitations as an effective measure

Indicate better measures and suggest how one of these overcomes these limitations as an effective measure. Requirement : The essay should write step by step, which is writing about "outline the limitation GDP . . . . " first then write "Indicate bett..

  Explain how nebraska can end up with trade

Suppose there are two states that do not trade: Iowa and Nebraska. Each state produces the same two goods: corn and wheat. For Iowa the opportunity cost of producing 1 bushel of wheat is 3 bushels of corn. For Nebraska the opportunity cost of prod..

  Do incumbent politicians utilize their power and influence

Do incumbent politicians utilize their power and influence to get re-elected. Is this a "valid" use of political power. How does this impact business firms. Please discuss.

  Find the producer surplus

The short run supply curve for an orange producer in Florida is P=.001Q, where Q is bushels of oranges produced in a year. The market value of a bushel of oranges is $20 a bushel.

  Mark quits his job as a company financial officer

Mark quits his job as a company financial officer

  What is the equation for country production possibility

What is the equation for the market demand for this good if there are only these three individuals in the market - What is the equation for Country A's production possibility frontier?

  Estimate the gdp impact of a positive change

Any change in the economy's total expenditures would be expected to translate into a change in GDP that was larger than the initial change in spending. This phenomenon is known as the multiplier effect. Explain how the multiplier effect works. (c..

  1 using the traditional keynesian model explain how

1. using the traditional keynesian model explain how contractionary monetary policy would affect equilibrium aggregate

  Discuss with specific reference to the bank of england

The problem belongs to Economics, mainly to Macroeconomics and the problem is about one of the most important functions of central bank which is undertaking monetary control.

  Your organization has invested million in a new trilithium

Your organization has invested $6 million in a new Trilithium crystal technology project. The company will generate huge profits if the project is successful.

  Annum of paying by monthly installments

Mr Ngoe valued his car at £10,500 and insured it for a net annual premium of £855, which includes a no claims discount of 55%. (a) Calculate the gross annual premium.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd