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Assume that aggregated balance sheet of Turkish firms is as shown below (assume initially 1 US Dollar = 7 Turkish liras). Assets Liabilities 800 Billion
Assume that aggregated balance sheet of Turkish firms is as shown below (assume initially 1 US Dollar = 7 Turkish liras). Assets Liabilities 800 Billion Turkish liras 100 Billion US dollars Equity (Net Worth) 100 Billion Turkish liras a. What kind of risk does this balance sheet imply? b. How does the net worth of the firms change if TL per USD exchange rate jumps from 7 to 8. How would this affect bank lending behavior? Explain. C. In such an economy would a depreciation of domestic currency imply a higher or lower output? Discuss the balance sheet channel (financial channel) versus the textbook channel of net exports (trade channel). d. If the firms' balance sheet indeed looks like above, how should the Central Bank of Turkey respond to a recession driven by a sharp exchange rate depreciation? By raising or cutting interest rates? Would using additional instruments (such as reserve requirements and foreign exchange interventions) mitigate the policy trade-offs? Assume that aggregated balance sheet of Turkish firms is as shown below (assume initially 1 US Dollar = 7 Turkish liras). Assets Liabilities 800 Billion Turkish liras 100 Billion US dollars Equity (Net Worth) 100 Billion Turkish liras a. What kind of risk does this balance sheet imply? b. How does the net worth of the firms change if TL per USD exchange rate jumps from 7 to 8. How would this affect bank lending behavior? Explain. C. In such an economy would a depreciation of domestic currency imply a higher or lower output? Discuss the balance sheet channel (financial channel) versus the textbook channel of net exports (trade channel). d. If the firms' balance sheet indeed looks like above, how should the Central Bank of Turkey respond to a recession driven by a sharp exchange rate depreciation? By raising or cutting interest rates? Would using additional instruments (such as reserve requirements and foreign exchange interventions) mitigate the policy trade-offs
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