Question

Consider a monetary expansion at home that lowers domestic interest rates. Using one of the models...

  1. Consider a monetary expansion at home that lowers domestic interest rates. Using one of the models studied in class, discuss what impact this would have on (nominal) exchange rates. What would the impact on net exports and output in the short run?
Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

There is a reduction in the domestic interest rates. consider the fact that the country is large enough to influence world economic variables. Lower interest rates will result in capital flight and net capital outflow in the country increases. This results in depreciating the currency which means the exchange rate will decline. For foreigners domestic exports will become cheaper which means exports increase and imports decline resulting in increasing net exports. output in the short run will therefore increase as net exports increase and this increases aggregate demand.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose the domestic and foreign interest rates are both initially equal. Now suppose the domestic interest...
Suppose the domestic and foreign interest rates are both initially equal. Now suppose the domestic interest rate rises. Explain what effect this will have on the exchange rate, net exports and consequently on output. Also, explain what must occur for the interest parity condition to be restored.
Consider the short-run money market model and the short-run exchange rate model together: a. Draw the...
Consider the short-run money market model and the short-run exchange rate model together: a. Draw the combined models in a single graph, showing the initial domestic interest rate (r1) and the initial exchange rate (e1) b. Show how the short-run model would change with a decrease in domestic money supply, specifically noting the impact on domestic interest rates, exchange rates, and the price level c. Following on from part (b), explain why the exchange rate changes d. In the long-run,...
expansionary monetary policy ________ real interest rates and ________ output in the short run, thereby ________...
expansionary monetary policy ________ real interest rates and ________ output in the short run, thereby ________ stock prices. a. lowers, rise, lowering b. raises, lowers, loweing c. lowers, raise, raising d. raise, raise, raising
1. When interest rates in Australia decrease relative to interest rates in other countries, we may...
1. When interest rates in Australia decrease relative to interest rates in other countries, we may see Australian dollar Select one: a. depreciation and a decrease in net exports. b. appreciation and an increase in net exports. c. appreciation and a decrease in net exports. d. depreciation and an increase in net exports. 2. We can expect an increase in the value (appreciation) of the Australian dollar relative to Indian rupiah when Select one: a. Indian economy is going into...
•Temporary changes in fiscal policy are more effective in influencing output and employment in the short...
•Temporary changes in fiscal policy are more effective in influencing output and employment in the short run: –The rise in aggregate demand and output due to expansionary fiscal policy raises demand for real monetary assets, putting upward pressure on interest rates and on the value of the domestic currency –To prevent an appreciation of the domestic currency, the central bank must buy foreign assets, thereby increasing the money supply and decreasing interest rates –In effect, under fixed exchange rates an...
1) The Central Bank of Thailand has decided that universal home ownership is a worthwhile goal...
1) The Central Bank of Thailand has decided that universal home ownership is a worthwhile goal for the country. To encourage new home construction and purchase, the CBT expands the Thai money supply significantly, thus pushing down interest rates on construction loans and mortgages. Assuming that CBT is operating under a floating exchange rate system, what happens to the value of the Thai currency - i.e., bhat - and its trade balance following the expansion of Thailand’s money supply? Select...
Assume interest rates increase in Mistyville but not in Silvania. Using a correctly labeled foreign exchange...
Assume interest rates increase in Mistyville but not in Silvania. Using a correctly labeled foreign exchange graph for Silvania, show and explain the impact of the change in interest rates on each of the following: the supply of Silvania’s dollar. the international value of Silvania’s dollar. Silvania’s net exports.
Monetary Policy in Keynesian Models of the Macroeconomy (a) The Keynesian consumption function is: C d...
Monetary Policy in Keynesian Models of the Macroeconomy (a) The Keynesian consumption function is: C d = C¯ + c(Y − T) − γcr. Provide an intuitive explanation for this equation. Define all terms. (b) Consider the AD-AS model. Assume that an economy is initially in an equilibrium with output equal to potential output. Then suppose the central bank alters its policy reaction function so that for any given inflation rate and output gap it sets a lower real interest...
Home is a small open economy with perfect (financial) capital mobility. Initially, it is in its...
Home is a small open economy with perfect (financial) capital mobility. Initially, it is in its long-run equilibrium and domestic assets and foreign assets are prefect substitutes. Recently, the United States reformed its tax system and lowered taxes. Many believe that this kind of development might have negative impacts on the Home economy and people worry that the negative impacts include the following: Change the world interest rate (Hint: you need to figure out what happens to the world interest...
1- Suppose fiscal policy makers pass a budget that cuts taxes in the current period and...
1- Suppose fiscal policy makers pass a budget that cuts taxes in the current period and are expected to cut taxes in the future. Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate. 3- What are the differences between the real exchange rate and nominal exchange rate? 4- Explain the difference between gross domestic product and gross national product 3- What are the differences between the real...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT