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# Quick%20Quiz%209%21 - W and Y(with T constant The decline...

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© Hadi Salehi Esfahani During the current year, total wealth, aggregate real income, and the nominal interest rate, will temporarily decline in Europe. Assume that the rate of inflation is given and: The interest parity condition holds, Economic conditions in the rest of the world are given. Expectations about the levels of all macroeconomic variables beyond the current year remain unchanged everywhere. 1. What is the impact of the above changes on the real amount that European households would want to consume this year? 2. What is the impact on the real investment in Europe this year? 3. What is the impact on the value of the euro compared to the dollar? 4. What is the impact on Europe’s net exports this year? Quick Quiz 9!

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© Hadi Salehi Esfahani 1. What is the impact of the above changes on the real amount that European households would want to consume this year? Consumption, C = C ( Y  T, W ), will decrease because of the decline in
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Unformatted text preview: W and Y (with T constant). The decline in i does not affect consumption. 2. What is the impact on the real investment in Europe this year? Investment, I = I ( i e ), will rise because the real interest rate is declining ( i is going down while inflation is expected to remain unchanged). Solution to Quick Quiz 9: © Hadi Salehi Esfahani 3. What is the impact on the value of the euro compared to the dollar? Treating Europe as the Home country and given the IP condition, since i decreases and i* and ee are constant, the euro spot rate, e , must decline. 4. What is the impact on Europe’s net exports this year? First note that the decrease in e while P and P* are constant means that the euro’s real exchange rate, ϵ = eP/P* , must depreciating. Since NX = NX ( ϵ , Y , Y* ), Europe’s net exports, NX , must rise as both ϵ and Y decline, while Y* is constant. Solution to Quick Quiz 9:...
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Quick%20Quiz%209%21 - W and Y(with T constant The decline...

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