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#1) Use the money market and foreign exchange rate diograms to answer the following questions. This question considers the relationship between the...

#1) Use the money market and foreign exchange rate diograms to answer the following questions. This question considers the relationship between the Euro and the US dollar. Let the exchange rates be defined as U. S dollars per Euro E$/e. On all graphs label the initial equalibrium point A. Suppose that with financial innovation the United States, real money demand in the U.S decreases.
a) Assume this change in the U.S real money demand is temporary. Using the FX money market diograms, illustrate how this change affects the money and FX markets. Label your short run equalibrium point B and your long run point C.
b) Assume this change in U.S real money demand is permanent. Using a new diagram, illustrate how this change affects the money and FX markets. Label your short run equalibrium point B and long run point C.
c) Illustrate how each of the following variables changes over time in response to a permanent reduction in real money demand: nominal money supply Mus/Pus, U.S interest rate I$ and the exchange rate E$/e.

#2) We can use the asset approach to both make predictions about how the market will react to current events and understand how important these events are to investors. Consider the behavior of the Union/ Confederate exchange rate during the civil War. How would each of the following events affect the exchange rate, defined as Confederate dollars per union dollar Ec$/$?
a) The confederacy increases the money supply by 2,900% between july and December 1861
b) The Union army suffers a defeat in Battle of Chikamauga in September 1863.
c) The confederate Army suffers a major defeat with Sherman’s March in the autumn of 1864

#3) In 2007 the country of Ikonomia has a current account deficit of $1 billion and a non reserve financial account surplus of $750 million. Ikonomias capital account is in $100 million surplus. In addition, Ikonomian factors located foreign countries earn $700 million. Ikonomia has a trade deficit of $800 million. Assume Ikonomia neither gives nor receives unilateral transfers. Ikonomia’s GDP is $9 million.
a) What happened to Ikonomia’s net foreign assets during 2007? Did it acquire or lose foreign assets during the year?
b) Compute the official settlements balance. Based on this number, what happened to the central banks (foreign) reserves.
c) How much income did foreign factors of production earn in Ikonomia during 2007?
d) Compute net factor income from abroad
e) Using the identity BOP =CA+FA+KA, show that BOP=0
f) Compute Ikonomia’s gross national expenditure, gross national income, and gross national disposable income.


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