rate and 18) Assume that the interest parity condition holds and that both the e
ID: 1161864 • Letter: R
Question
rate and 18) Assume that the interest parity condition holds and that both the expected exchange foreign interest rate are constant. Given this information, a reduction in the domestic interest rate will cause A) a reduction in the exchange rate expected in the future. B) a reduction in the current exchange rate. Q greater depreciation of the domestic currency expected in the future. D) all of the above 19) For this question, assume that there is a simultaneous tax increase and monetary expansion. In a lexible exchange rate regime, we know with certainty that A) the exchange rate and output would both increase. B) the exchange rate would increase and output would decrease. C) the exchange rate would decrease. D) the exchange rate would decrease and output would increase. 20) Contractionary monetary policy in a flexible exchange rate regime will cause A) a shift of the IP curve. B) a depreciation of the domestic currency. C) an increase in E D) no change in E.Explanation / Answer
Answer:
c) when the domestic interest rates fall, investment is shifted from domestic to foreign assets. this cause domestic currency to depreciate .
c) exchange rate woul decrease, the tax increase will lower the IS curve while monetary expansion will shift LM curve to the right. Thus we have an ambiguious effect on output but both will decrease exchange rates reinforcing each other.
c) an increase in E
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