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Problem Set 6 Key

They would like to open up capital markets by

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Unformatted text preview: and real (R) exchange rates fall. The lower exchange rate means that the cost of US goods is now cheaper on the world stage, which increases the demand for US exports. Thus, NX rises. In summary, if the real discount rate decreases, investments increase in both the IS and IS$ curves, but the IS$ curve has an extra increase because net exports have increased. Thus, the IS$ ends up flatter than the IS curve. 3. Suppose counterfactually that you are the chief economic adviser to the new Chinese government. They would like to open up capital markets by allowing free flows of financial capital, remove all restrictions on banks and hedge funds, and allow unlimited international movements of currency and assets. It believes that these measures will help China make the transition to a mature modern market economy. It also wants to keep control over the exchange rate and monetary policy. Write a very short memorandum about the proposal? (No diagrams necessary. 150 words should be sufficient.) The policy is not feasible because an open economy can only have two of the following three characteristics a. Fixed exchange rate b. Free capital movement acros...
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