Question 8. Using all relevant diagrams, fully describe the impact of a temporary reduction in taxes at home on output, interest rates, exchange rates (nominal and real), as well as the trade balance. Your description must explain the behavior on the money market, the foreign exchange market, and the goods market. Assume a free-floating exchange rate and sticky prices. Question 9. Using all the relevant diagrams, show how a temporary shock to the demand for money (a financial shock) causes a recession at home. Suggest a fiscal and a monetary policy to fight this recession. In doing so, discuss the effects on home output, home interest rate, the nominal exchange rate, and the trade balance. Assume a free-floating exchange rate and sticky prices. Question 10. The Central Bank of the Belize pegs the Belize Dollar to the United States Dollar at a price of 2 BZD per USD. Describe and analyze a monetary policy intervention that the Central Bank of the Belize must pursue in response to a temporary reduction in foreign (US) output (but no changes in foreign interest rates i*). Using all the appropriate diagrams, your analysis must describe the Belizean money and output markets, as well as the foreign exchange market. To perform this task, you must assume that prices are sticky. Question 11. Using all relevant diagrams, fully describe the impact of a permanent increase in the stock of money at home on interest rates and exchange rates (nominal and real). Your description must explain the behavior on the money market, the foreign exchange market, and the goods market. Assume a free-floating exchange rate, no output effects, and sticky prices. Question 12. Assume that inflation rates are 1 percent per year in the United States and 1 percent per year in Canada. Also assume that the Canadian dollar is currently overvalued by 10 percent against the United States dollar, relative to a PPP value of 1 (so that, q=1.1). Using the fact that the speed of convergence is 15 percent per year, by what proportion do you expect the Canadian dollar to appreciate or depreciate over the next year? Question 8. Using all relevant diagrams, fully describe the impact of a temporary reduction in taxes at home on output, interest rates, exchange rates (nominal and real), as well as the trade balance. Your description must explain the behavior on the money market, the foreign exchange market, and the goods market. Assume a free-floating exchange rate and sticky prices. Question 9. Using all the relevant diagrams, show how a temporary shock to the demand for money (a financial shock) causes a recession at home. Suggest a fiscal and a monetary policy to fight this recession. In doing so, discuss the effects on home output, home interest rate, the nominal exchange rate, and the trade balance. Assume a free-floating exchange rate and sticky prices. Question 10. The Central Bank of the Belize pegs the Belize Dollar to the United States Dollar at a price of 2 BZD per USD. Describe and analyze a monetary policy intervention that the Central Bank of the Belize must pursue in response to a temporary reduction in foreign (US) output (but no changes in foreign interest rates i*). Using all the appropriate diagrams, your analysis must describe the Belizean money and output markets, as well as the foreign exchange market. To perform this task, you must assume that prices are sticky. Question 11. Using all relevant diagrams, fully describe the impact of a permanent increase in the stock of money at home on interest rates and exchange rates (nominal and real). Your description must explain the behavior on the money market, the foreign exchange market, and the goods market. Assume a free-floating exchange rate, no output effects, and sticky prices. Question 12. Assume that inflation rates are 1 percent per year in the United States and 1 percent per year in Canada. Also assume that the Canadian dollar is currently overvalued by 10 percent against the United States dollar, relative to a PPP value of 1 (so that, q=1.1). Using the fact that the speed of convergence is 15 percent per year, by what proportion do you expect the Canadian dollar to appreciate or depreciate over the next year
