About International Economic

1. Assume that Home output Yh is endogenously determined by the goods mar- ket equation. Home money supply M., increases by 10% permanently. The real money demand function is in the form LRH, Yh) = RH (1) where Ry is the nominal Home interest rate. a) Use a AA-DD diagram to show that undershooting could exist. b) If overshooting occurs, state the range of the possible percentage change in YH. (That is, find out the maximum and minimum percentage changes of YH). In part c) below, assume that before the money supply change, Yy is initially at the full employment level yf, where Y1 = 1. The consumption and current ac- count functions are, respectively, C=C+0.7(YH-T) (2) CA=qhif-0.4(YH-T) (3) where quif is real exchange rate of Home per unit of Foreign currency, C is an autonomous consumption, and T is a lump-sum tax. c) Suppose that there is no undershooting and no overshooting. Denote as que 9fp, and he the initial, short-run and long-run equilibrium real exchange rates, respectively. Calculate the values of q'p qp, and and HRF 1. Assume that Home output Yh is endogenously determined by the goods mar- ket equation. Home money supply M., increases by 10% permanently. The real money demand function is in the form LRH, Yh) = RH (1) where Ry is the nominal Home interest rate. a) Use a AA-DD diagram to show that undershooting could exist. b) If overshooting occurs, state the range of the possible percentage change in YH. (That is, find out the maximum and minimum percentage changes of YH). In part c) below, assume that before the money supply change, Yy is initially at the full employment level yf, where Y1 = 1. The consumption and current ac- count functions are, respectively, C=C+0.7(YH-T) (2) CA=qhif-0.4(YH-T) (3) where quif is real exchange rate of Home per unit of Foreign currency, C is an autonomous consumption, and T is a lump-sum tax. c) Suppose that there is no undershooting and no overshooting. Denote as que 9fp, and he the initial, short-run and long-run equilibrium real exchange rates, respectively. Calculate the values of q'p qp, and and HRF