# Homework 2AnswerKey - Homework 2 1 Chapter 15#11 Explain...

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Homework 2 1. Chapter 15, #11: Explain how the nominal dollar/euro exchange rate would be affected…. 2. Chapter 15, #15: Discuss the following statement: “When… 3. Chapter 15, #9: A country imposes a tariff on imports from abroad… 4. Chapter 16, #4: Suppose there is a permanent fall in… 5. Chapter 16, #6: If a government initially has a balanced budget… (Hint: balance budget means that government finances higher G by increasing Taxes). 6. Chapter 16, #3: Imagine that Congress passes… 7. Chapter 17, #7: How does fiscal expansion affect the current account under fixed exchange rate? 8. Chapter 17, #10 Using the DD-AA model analyze the output… 1. We derived in class from our definition of q, that ∆q= = ( qe US/EU - q US/EU)/ q US/EU = [( Ee \$/€ - E \$/€)/ E \$/€] – ( π e US - π e EU) Hence, a permanent increase in the expected rate of real depreciation of the dollar against the euro leads to a permanent increase in the expected rate of depreciation of the nominal dollar/euro exchange rate, given the differential in expected inflation rates across the U.S. and Europe. 2. r(e) = R – πe R = r(e) + πe The answer to this question involves the comparison of a sticky-price with a flexible- price model. In a model with sticky prices (the case of the short-run), a reduction in the money supply causes the nominal interest rate (R) to rise and, by the interest parity relationship, the nominal exchange rate to appreciate. The real interest rate, which equals the nominal interest rate minus expected inflation, increases both because of the increase in the nominal interest rate and because there is expected deflation. In a model with perfectly flexible prices, an increase in expected inflation causes the

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Homework 2AnswerKey - Homework 2 1 Chapter 15#11 Explain...

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