RQ_Solution_Ch_15 - ECMC61 Chapter 15 Review Questions...

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ECMC61 – Chapter 15 Review Questions Answer Key Question 1: Problems #4 Given expectations about future exchange rates remain unchanged, when domestic real GNP increases: Households want to consume more goods and services transaction volume Real money demand from L(R, Y 0 ) to L(R, Y 1 ). Money market now clears at a higher interest rate, R to R 1 . Given E e and R* are held constant, the curve does not shift. When R , at the initial exchange rate, E 0 Home experiences capital inflows demand for DC DC appreciates. Point B is the equilibrium: DC appreciates to E 1 . E E 0 A E 1 B ROR R 0 R 1 L(R, Y 0 ) L(R, Y 1 ) (MS/P) (M/P) 1
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Question 2:, Problems #10 Case 1: A permanent in MS without affecting real output in the short run: When MS from MS 0 to MS 1 , real money supply from to and R from R 0 to R 1 . Given it is a permanent increase in MS; the domestic price level will increase in the future (money is neutral and in the long run ). Domestic goods and services become more expensive, export and the demand for DC fall in the future. Agents expect DC to depreciate in the future , i.e., E e from E e.0 to E e,1 . The expected DC rate of return on FC deposit curve shifts up and to the right from to . At the initial exchange rate, E 0 , Home experiences capital outflows. Point B is the equilibrium:
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This note was uploaded on 12/21/2011 for the course ECONOMICS ECMC61 taught by Professor Dr.irisau during the Fall '11 term at University of Toronto- Toronto.

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RQ_Solution_Ch_15 - ECMC61 Chapter 15 Review Questions...

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