Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

These questions address the short run effects of financial shocks and policy responses on the overall economic performance of an economy that initially runs a

These questions address the short run effects of financial shocks and policy responses on the overall economic performance of an economy that initially runs a current account deficit. They refer to a length of run over which the productive capital stock is fixed, determined by previous investment. New investment creates expenditure on current GDP but does yet not affect current production capacity. External factor income flows net out at zero.

All questions require diagrams that represent the domestic financial capital market and the market for foreign exchange, interlinked by the balance of payments (BoP = CA + KA = 0), and the money market, interlinked in turn with the financial capital market by the real long maturity yield, r. Unless otherwise stated, assume there is no expected inflation (e = 0, so the nominal and real long maturity yields are equal, i = r), and assume at the outset that all markets clear, including the labour market, and hence that the nominal wage, W, is flexible. Revise these assumptions only when instructed.

An economy that has been recessed with very low short maturity yields has embarked on a period of unconventional monetary policy (UMP), causing a significant enlargement of its central bank's balance sheet. It is now subjected to a financial optimism shock that takes the form of a rise in the expected, risk adjusted, net rate of return on installed capital, rce and a rise in expected future income, Ye. Its central bank targets the price level, PY.

  1. Assuming no further changes in the nominal money supply, use diagrams to illustrate the effects of this combined optimism shock on the yield on long maturity instruments, the current account, the real exchange rate, and the nominal exchange rate.
  2. Infer the changes in the volumes of consumption, saving and investment within the home economy, briefly explaining your results. please answer the questions thx

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Climate Policy And Nonrenewable Resources The Green Paradox And Beyond

Authors: Karen Vollebergh, Rick Van Der Ploeg

1st Edition

0262319845, 9780262319843

More Books

Students also viewed these Economics questions

Question

What, if any, financial support do they provide their students?

Answered: 1 week ago

Question

The background knowledge of the interpreter

Answered: 1 week ago