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Unformatted text preview: Problem Set #6 (Fall 2006) 1 Name: _______________________ SID: _______________________ Discussion Section: _______________________ Problem Set #6 Due Tuesday, November 21, 2006 Problem Sets MUST be word-processed except for graphs and equations. QUESTIONS 1. Suppose that a country begins with both internal and external balance, has a fixed exchange rate, and relatively immobile capital. Use an IS-LM-BP model to clearly show what happens to equilibrium income and interest rates if there is an decrease in foreign income. Also provide a brief economic explanation of that is happening to equilibrium income, interest rates, and the central banks foreign exchange reserves. Finally, clearly show and briefly explain what, if anything, the monetary authorities can do to re-establish joint internal and external equilibrium. 2. Uforia is an open economy with a fixed exchange rate. The government is committed to maintaining the fixed exchange rate. The economy is characterized by highly mobile capital flows. The economy has achieved both exchange rate....
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