PSLecture11 - Problem Set for Lecture 11 The Pacific Basin...

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Problem Set for Lecture 11 The Pacific Basin Economic Meltdown of 1997: All Fall Down [December 1, 2009] Note: Questions marked T may be selected for Tutorials. T11.1 “Liam reviews the foreign exchange diagram for a hypothetical country, which shows the demand curve for foreign exchange [debits in the balance-of-payments statement] and the supply curve for foreign exchange [credits in the balance-of-payments statement]. The vertical axis is labeled “local currency per unit of foreign exchange” and the horizontal axis is labeled “the quantity of foreign exchange”. Liam argues, that using diagrams only, the following independent shocks would have the following results on the foreign exchange rate for the hypothetical country, assuming that the country had adopted a flexible foreign-exchange rate regime: a. Shock 1 : imports into this country increase: Result: an appreciation of the country’s currency; b. Shock 2 : foreign direct investment flows into this country: Result: an appreciation of the country’s currency; c. Shock 3 : international financial flows leave the hypothetical country: Result: an appreciation of the country’s currency; d. Shock 4 : the hypothetical country increases short term interest rates: Result: a depreciation of the country’s currency; e. Shock 5 : exports from this hypothetical country decrease: Result: a depreciation of the
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PSLecture11 - Problem Set for Lecture 11 The Pacific Basin...

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