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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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- Fall '08
- Inflation, HADI SALEHI ESFAHANI