PS5 - METU / FEAS / Department of Economics Econ 354:...

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1 METU / FEAS / Department of Economics Econ 354: Introduction to International Economics II / Spring 2010 Student assistants: Merve Mavu ş ğ lu ([email protected]) Course assistant: Seda Ekmen ([email protected]) Instructor: Emre Özçelik ([email protected]) Problem Set # 5 – Chapters 25, 26 and 27 Part I. End-of-chapter questions and problems Chapter 25 25.1. Explain carefully why a country settles in equilibrium at the intersection of the IS, LM, and BP curves. 25.2. Why is domestic monetary policy ineffective in an open economy under a fixed exchange rate regime? 25.4. Explain why a developing country with a fixed exchange rate and foreign exchange controls in place (perfectly immobile capital) may find itself dependent on growth in exports, foreign investment, or foreign aid to attain economic growth. 25.5. Under what capital flow conditions is fiscal policy least effective in a fixed-rate regime? Most effective? Why? 25.6. Why does devaluing the domestic currency have an expansionary effect on the economy? Does this expansionary effect take place if capital is perfectly immobile? Why or why not? Chapter 26 26.1. What will happen under flexible rates if the intersection of the IS and LM curves is below (or to the right) of the BP curve? Why? 26.2. What exogenous real and financial factors influence the position of the BP curve? 26.3. Under what capital mobility conditions is fiscal policy totally ineffective in influencing income? Explain why this result occurs. 26.4. One strong argument for a flexible exchange rate system is that it frees up monetary policy for use in pursuing domestic targets. Explain why this is so. 26.7. If short-term capital is neither perfectly immobile nor perfectly mobile internationally, why is the predicted impact of expansionary fiscal policy on the exchange rate ambiguous? Chapter 27 27.3. Is it possible that increased international economic transactions could affect the aggregate supply curves? Why or why not? 27.4. In the 1990s Germany attempted to control inflation through a restrictive monetary policy and high interest rates. Explain how this might have influenced income and prices in the United States? 27.5. Explain how appreciation of a country’s currency could affect its aggregate supply curves when imported intermediate inputs are sizable. 27.7. If a country finds itself experiencing stagflation under a flexible-rate system, why is expansionary monetary policy unlikely to cure the problem? Why are technological improvements or general productivity improvements so critical in this situation? 27.8. Suppose that a home country’s currency is expected to depreciate in a flexible-rate system. Trace through the effects on home country AD, AS, prices, and income (output).
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2 Part II. Multiple choice questions 1. In the Mundell-Fleming framework with fixed exchange rates, expansionary fiscal policy and contractionary monetary policy would be recommended if a country were faced with:
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This note was uploaded on 05/26/2010 for the course ECON 354 taught by Professor Emre during the Spring '10 term at Middle East Technical University.

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PS5 - METU / FEAS / Department of Economics Econ 354:...

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