Homework3-answers - Economics 431/531 Ruxandra Prodan...

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Economics 431/531 International Finance, Fall 2005 Ruxandra Prodan Problem Set 3- Solutions 1. ( 2 points)Describe in words and graphs (in the Y-E space) the following: a) A shift in AA schedule caused by a decrease in money supply AA schedule shifts to the left and the currency appreciates. b) A shift in AA schedule caused by a reduction in money demand AA curve shifts to the right and the currency depreciates. c) A shift in AA schedule caused by a decrease in the exchange rate expectations AA curve shifts to the left and the currency apreciates. d) A shift in DD schedule caused by a decrease in price DD curve shifts to the right . e) A shift in DD schedule caused by a increase in consumption (and decrease in savings) DD curve shifts to the right . f) A shift in DD schedule caused by a decrease in taxes DD curve shifts to the right . 2 a) Suppose the following headline appears in today’s newspaper: ”The Congress and the President agree to tax cut next year”. What would you expect the effect of this headline to be on output and the exchange rate today? This causes the expected exchange rate to appreciate which shifts the DD curve out and appreciate the exchange rate today while increasing output today. b) Suppose this headline appears in today’s newspaper instead: “Federal Reserve bank announces that it will raise money supply next year” What would you expect the effect of this headline to be on output and the exchange rate today? The expected exchange rate depreciates, shifting out AA curve, causing output to
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Homework3-answers - Economics 431/531 Ruxandra Prodan...

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