RQ_Solution_Ch_18 - ECMC61 Chapter 18 Review Questions...

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ECMC61 – Chapter 18 Review Questions Answer Key Question 1: Problems #1 Suppose central bank purchases DA (DA CB ): DA CB MS R . Holding other things constant, or R < R* home experiences capital outflows DC is under pressure to depreciate because of excess supply of DC at the official exchange rate. To prevent DC from depreciating, central bank has to buys DC and sells FC in the foreign exchange market until R = R* or until E returns to the official level. When central bank buys DC, MS back to its original level . When central banks sell FC, its holding of FA CB decreases (the reduction in FA CB = the increase in DA) overall there is no change in central bank’s assets but the composition of assets changes. Since there is no change in central bank’s assets, its liabilities remain unchanged and there is no change in MS . Regarding to the BOP accounts, when there are capital outflows, there will be a debit entry in non-reserve KA (non-reserve KA deficit). This debit entry is offset by a credit entry in ORT because central bank sells FC. 1
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Question 2: Problems #4 Suppose there is a devaluation of DC from E 0 to E 1 : Short Run: When DC devalues to E 1 , with P and P * held constant, domestic goods become relatively cheaper (real depreciation of DC, q ) CA
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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_18 - ECMC61 Chapter 18 Review Questions...

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