Question
Help me out with the following question please : Questions 1: Suppose the central bank a small country with a fixed exchange is faced by
Help me out with the following question please :
Questions 1:
Suppose the central bank a small country with a fixed exchange is faced by a rise in the world interest rate, What is the effect on its foreign reserve holdings and on its money supply? Can it offset either of these effects through domestic open-market operations?
Question 2:
Use the DD-AA model to examine the effects of a one-time rise in the foreign price level, P*.If the expected future exchange rate rises immediately in proportion to P* (in line with PPP), show that the exchange rate will also appreciate immediately in proportion to the rise in P*.If the economy is initially in internal and external balance, will its position be disturbed by such a rise in P*?
Question 3:
If foreign inflation rates rise permanently, do you expect floating exchange rates to insulate the domestic economy in the short run? What would happen in the long run? In answering the latter question pay attention to the long-term relationship between domestic and foreign nominal exchange rates.
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