Exam 2-key - NAME Exam 2 - ECO 215 ~ SPRlNG 2008 i CUTLER...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: NAME Exam 2 - ECO 215 ~ SPRlNG 2008 i CUTLER This exam is TAKE-HOME and consists only of graphing questions. Each question is worth 4 points except where indicated. The total points possible are 35. The exam is due in class on March 10th (first Monday after the break). Please, add more lines to answer space as necessary. GOOD LUCK I INSTRUCTIONS graphs 0 Drawings can be manual and not numerically precise (similar to the ones drawn in class), but have to be as clear as possible, a All questions require the use of the combined coordinate system of the money market and the foreign exchange market (for example see Figure 14-6 in the book). 0 Where necessary and possible, please, use one color pen or pencil to indicate the variables and functions in the initial state of the economy, a second different color to draw the variables and fimctions in the Short-Run state of the economy, and a third different color to draw the variables and fianctions in the Long—Run state of the economy. 0 Where necessary, clearly mark the exchange rate equilibrium value with number 1 for the initial state, number 2 for the Short-Run state and number 3 for the Long- Run state of the exchange rate. verbal explanation - For each question, include a short verbal explanation of the sequence of changes in the economy and the direction of change for each variable a interest rate, prices, money supply or demand, exchange rate, and any other variable involved in the specific question. The description can be simply a listing of the variables in the correct sequence of events, along with direction change for each variable. (for example “R$T, MR3. Yus) 1,, Ee$l€ T, (R€+ (Ees/e ' s/ellEs/e )T,E$/5T ) assumptions - Unless otherwise indicated, assume that the economy is initially in its Potential level of production and at its LongwRun equilibrium level of interest rate, that there is no long~run expected inflation, and that all else is the same (i..e “ceteris paribus”). Consider the domestic country to be US and the foreign country to be EU. PROBLEM 1. (4 points for each question, with exception of question A which is 3 points) Consider the monetarist approach Purchasing Power Parity theory of exchange rate determination: 5% = Pris/Pen = (M51;le (Rs! Yus) ) / (Msrsu/L (Re: YEU) ). Draw the Long—Run only (flexible price) effects of the following changes. (as an example and solution to question A below, see the graph in the appendix to Chapter 15. For all of your answers in this exam, it is not necessary to draw all four quadrants — the Northeast and Southeast quadrants will be sufficient). A) Show the effects of an Increase in long—run equilibrium R$ due to higher inflation tat' . , p expec 10H k4. Lek. _ (21m firith it \‘ 1"»? x\ \\ a a \ \ l t \ ’27} t \ .I e \ ‘ r 'fllé _ a a Sr, . , \ , 5 flax L {um . f " " » 52 m “flue A, ‘ FM“ 3; 1 n r - _ _ flldi 7 i +._ n» r r . r ' ' MM L ? IV {Ci-.1 vi [is ‘ A M k , A e -i 7?; 7 /l\ A” 5 ii?» w ~ -- ' W ' i iii \ / , "kl \ ‘ 1 ‘- l "i ,I f? ‘ E' ill; ( ,1, l/f l B) “Show the effects of a Decrease in nominal Ms in US g,:i_ ,1 x that: (a; l e g iE\\: i 1. ! vs? i if), i. l - fig;- v—‘a 5. Mg Twii (H (x g? L r- \ . {Am-w; I k . J D) 111 Part C above, how would your answer change if you use the more generai approach to long-run exchange rate determination including the real exchange rate variable. Esre : qUS/EUX P us/P EU 1'. w \A’ W \ xix cites a is: we; E) Show the effects of a Decrease in Y in EU (indicate the effects using the coordinate system of the US money market and foreign exchange market) {gm ? ? V-té Ln M! \ i x g H ‘ W V y \\ q ‘3” “V [Min uni“? ,, on: f \ x I _ . V i K E ‘ \t {3 it; ‘ {71“ i Y , ix; 5 we; 1' 4355 it 2) “‘3? a hunk; of f — Fl, fist t' ;— A: K \-\ [g I ', é - \ REFS 7——L»——«_— __ ,1“; a . 'W/ -‘ m «m _‘ _‘ , ‘w ‘ ‘ it _; L"(we 1dr; 0 h P J ‘ J r r I l , ~J, r. \ t‘é’; _ ‘ t 1 3 5M3 T)" /‘ kl ./ 1 4" -L L {Ag 5"". PROBLEM 2. Consider the Short-Run/Long—Run exchange-rate determination model approach in Chapter 14 (where prices are assumed to be “sticky” in the short-run and “flexible” in the long-run). Assume that people form expectations about the future exchange rate using the Monetarist Approach PPP theory: Es/e = P us/P EU = (MSUSIL (Rs. Yus) ) I (MSEU/L (Re YEU) ) Draw both the Short— Run and Long mn changes (on the same graph) in the economy as a result of each of the following changes : A) Show the effects of a Decrease in nominal Ms in US \ . ! i l. :fil I" ‘ K in" \g/"L‘ 3‘? 4‘ V 433» - » d) j» 1‘ :- if , _ [IDL itzt Ed u f ,1," X ) , "‘1 V a " ’3 -‘ Vi; LET i C) fi/g Ip‘igC/ I‘M : £ ‘ .7 .r‘ l” ‘ A ‘ , 'LLL {J ‘ ’ U \M oil “i3; CUPRUAW vam J i (23/) B) Show the effects of a permanent decrease in potential US output Y, (perhaps, due to a war which destroys a vast amount of resources) A " ' ‘ ‘ yttk‘iflclg hazing?le Ht 1“ '3' ‘\\\ ’ i a “\ \K ‘ [1 3TH: , . r _ :5 i3) r ' ' ' ' \\\" 11‘, > ‘ Q:- l-) /7 fl ) Jk g .(r i {if} I / { c c i ’7 Ms 3 pflwf’l‘l/JK‘MJ f F— i — _ — >fi f fl K ‘ A7 ) / I S (v r i " :> tfliétil i0 7:) 5 E’lhgir‘tbkgi \ it \k r m ‘4 J g? 9—— a: if C'. is J“ a? E 2L Wit-m Liming) C) Suppose that @erhaps, due to recently pursued expansionary monetary policy), the current R33 is at a level below the Long-Run equilibrium interest rate and the level of output Y is currently still below its potential level. Using the current state of the economy as your initial state in the graphs, please, indicate the effects of a nominal Ms decline in US.(assume that in the long run, the economy will achieve Long-Run potential GNP and interest rate will become equal to the Long—Run Equilibrium interest rate). ‘,".[:.< 4 ~, Ll ‘\ ‘l l5”! h Fig - l E s l \ 1 r l l at," D) in question C above, does the exchange rate overshoot or undershoot in the short run? Can the result change if you vary the degree of the nominal money supply change? Explain. lr :‘- J‘ 9i , My “ x \ ‘ ‘ V L’ , x. 'P , l _ (“the V .x f bk 2 \ f is“; 5 L M15 4- 7 ‘. ~ . ‘ V r r ‘ mt? ‘ '7 t . L 1 ‘7 (CM) \J~4L{I ‘1? ‘. E w A be»! $1 > t, l, \ f {if Wt >1 I t P w ». m: l t r I . , ‘ . \_ ,. l r e “a ‘ l l \l " I e l a“ ‘ ' 3 a" ‘ \AA =L.\ ~l " ‘ K \3 W' ‘1/\ | U I l A ‘ k a l c t 151'?» / ‘ l ' ‘I’ ,v ’ ,7 Ht, t fix \" l 3 “ ...
View Full Document

Page1 / 5

Exam 2-key - NAME Exam 2 - ECO 215 ~ SPRlNG 2008 i CUTLER...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online