Suppose that there is a temporary decreases in rho, the risk premium on domestic

Question

Suppose that there is a temporary decreases in rho, the risk premium on domestic assets. Using an AA-DD diagram for a floating exchange rate system, show what happens to national income and the exchange rate as a result of this temporary increase in government spending Explain what causes any curves to shift. On another AA DD diagram, show how this same temporary increase in government spending would impact on national income in the short-run if there was a fixed exchange rate system instead. Explain what causes any curves to shift. Under which regime (floating or fixed) is the impact on national income greater? Suppose the increase in government spending were permanent instead. Show on the AA-DD diagram what would happen to output and the exchange rate in the short run and in the long run under a floating exchange rate system Assume the country begins at a long-run equilibrium. Consider country Z which is involved in a floating exchange rate regime. Suppose country Z's economy is in a long-run equilibrium initially and then there is a permanent increase in country Z's money demand Using an AA-DD-XX diagram, determine what happens in the short-run to output, the exchange rate, and the current account in country' Z. What type of fiscal policy --expansionary' or contractionary--should country Z's government engage if it wishes to return to full employment output in the short run. Explain using the AA-DD-XX diagram. What type of fiscal policy--expansionary or contractionary--should country Z's goyenunap engage if it wishes to return to the initial current account level in the short-run? Explain using the AA-DD-XX diagram.

Explanation / Answer

Dear sir /madam,

Investment is spending on additions to the firm capital, such as machines or buildings Typically, firms borrow to purchase investment goods. The higher the interest rate for such borrowing, the lower the profits that firms can expect to make by borrowing to buy new machines or buildings, and therefore the less they will be willing to borrow and invest. Conversely, firms will want to borrow and invest more when interest rates are lower.

The investment curve is negatively sloped to reflect the assumption that a reduction in the interest rate increases the profitability of additions to the capital stock and therefore leads to a larger rate of planned investment spending.

Due to high investment demand, the capital would rise leading to high output and income. The exchange rate would be in favouraourable terms leading to more incoming of foreign currency. The interest rate would fall and there would be more favourable balance of payments.

b)The country z should follow an expansionary policy and do more govt. spending so that there is more demand for labor and hence the output rises. It should also decrease the bank rate and do more foreign investments so as to explore more avenues for investment.

c)The country z should use contractionary policy and increase tax rate to curb inflation.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.