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- Explain how the flexible exchange rate may be use to correct disequilibrium within an economy.Given that the country has a floating exchange rate regime, what are the consequences of a policy mix consisting of simultaneous expansionary fiscal policy and restrictive monetary policy?Explain how the exchange-rate transmission mechanism can strengthen the interest-rate transmission mechanism following an expansionary monetary policy under a floating exchange rate regime.
- Explain the assumptions that "central banks cannot follow independent monetary policies in a fixed exchange rate regime"Explain the links between an expansionary monetary stimulus and the foreign exchange rate.Under a floating exchange rate system, use the Mundell-Fleming model to predict with the aid of a graph, what would happen to the following variables when the money supply is reduced. Exchange Rate: (increase, decrease, or unchanged?) Trade Balance: (increase, decrease, or unchanged?) Aggregate Income: (increase, decrease, or unchanged?) Please provide a graph to support your answer.
- Given your understanding of exchange rate regimes, carefully explain why it is impossible for a nation to have free capital flows, a fixed exchange rate and an independent monetary policy.How does a country’s decision to fix its exchange rate to that of another nationshape the conduct of monetary policy?Empirical studies find that exchange rates are much more variable than inflation differentials. How can we explain this empirical result?
- When is exchange-rate targeting likely to be a sensiblestrategy for industrialized countries? When is exchangerate targeting likely to be a sensible strategy for emerging market countries?Consider a floating exchange rate regime. How does higher government purchases affect output and interest rate in equilibrium? Answer and discuss with the help of the diagram given (e.g., show what curves will shift, label curves and axes correctly). Consider a fixed exchange rate regime. How does higher government expenditure affect output and interest rate in equilibrium? Discuss with the help of the diagram (e.g., show what curves will shift, label curves and axes correctly). Are your conclusions in (1) and (2) consistent with Mankiw's conclusion using the IS-LM diagram drawn in exchange rate-Output axes? Discuss.shows the expected effect on the value of the USD/EUR exchange rate under such monetary stimulus