How the exchange rate acts as an automatic stabilizer

Reference no: EM131135111

The exchange rate as an automatic stabilizer

Consider an economy that suffers a fall in business confidence (which tends to reduce investment). Let UIP stand for the uncovered interest parity condition.

a. Suppose the economy has a flexible exchange rate. In an IS-LM-UIP diagram, show the short-run effect of the fall in business confidence on output, the interest rate, and the exchange rate. How does the change in the exchange rate, by itself, tend to affect output? Does the change in the exchange rate dampen (make smaller) or amplify (make larger) the effect of the fall in business confidence on output?

b. Suppose instead the economy has a fixed exchange rate. In an IS-LM-UIP diagram, show how the economy responds to the fall in business confidence. What must happen to the money supply in order to maintain the fixed exchange rate? How does the effect on output in this economy, with fixed exchange rates, compare to the effect you found for the economy in part (a), with flexible exchange rates?

c. Explain how the exchange rate acts as an automatic stabilizer in an economy with flexible exchange rates.

Reference no: EM131135111

Questions Cloud

What would you gain if the truth was told : Discuss the implications of including your arrest and the implications for including your friend. Use theoretical concepts associated with ethics to help you determine the consequences (good or bad) associated with immoral behaviors and how you fo..

Describe how the nonrenewable resource was initially formed : Describe how this nonrenewable resource was initially formed. Briefly explain where the major reserves of this nonrenewable resource are located and how it is extracted.

Two major themes or core ideas in twelfth night : 2. The essay and work cited page must follow the MLA guidelines for style. The work cited page is always the last page of the essay. It should not be submitted as a separate document.

Describe the term mis indicating the management levels : Describe the term MIS indicating the management levels it works best.Discuss any three impacts of MIS on an organization.

How the exchange rate acts as an automatic stabilizer : Explain how the exchange rate acts as an automatic stabilizer in an economy with flexible exchange rates.

Find out how recycling materials need to be separated : Find out how recycling materials need to be separated and the dates and times of recycling pickup in your area. If you do not have recycling in your area, select a nearby community that offers recycling and use their information to guide your assi..

What do you think are the people perceptions of probation : What are your current perceptions regarding corrections, probations, and parole in the United States? What are these perceptions based on? What do you think are the people's perceptions of probation and parole?

Examine advantages and drawbacks of demographic transition : Include the following points in your timeline in order to examine the advantages and drawbacks of demographic transition in your selected country.

Pacific northwest regional manager at vyeco technologies : You arethe Pacific Northwest Regional Manager at VyEco Technologies, a mid-sized technology company with headquarters in Boston, MA. You have noted that several colleagues in your regional office struggle with professional business communication ..

User Account

All Pages