Posted: April 6th, 2015

International Monetary Economics

International Monetary Economics

1. Show graphically the short term effect of a drop in the interest rate offered by
Euro deposits, R$, and the effect on the exchange rate, .
2. Suppose there is a reduction in aggregate real money demand, that is, a negative
shift in the aggregate real money demand function. Trace the short and long-run
effects on the exchange rate, interest rate and price levels. Use the asset approach
to the balance of payments [chapters 14 (3) and 15 (4)].
3. The velocity of money, V, is defined as the ratio of real GNP to real money
holdings. Then, in chapter 15 (4) notation V=Y/(M/P). Use equation 4 in chapter
15 (4) to derive an expression for velocity and explain how velocity varies with
changes in R and Y. (Hint: the effect of output changes on V depends on the
elasticity of aggregate money depend with respect to output, which economists
believe to be less than one). What is the relationship between velocity and the
exchange rate?
4. Explain
(graphically)
why
an
increase
in
the
money
supply
generates
an
overshoot
of
the
exchange
rate
in
the
short
run
in
the
“Asset
Approach”
to
the
balance
of
payments.
Explain
the
figure
thoroughly.
5. Graphically
show
the
effect
of
a
decrease
in
the
growth
rate
of
the
money
supply
on
the
exchange
rate
under
the
assumptions
of
the
“Monetary
Approach”
to
the
balance
of
payments.
6. At
the
end
of
World
War
I,
the
Treaty
of
Versailles
imposed
an
indemnity
on
Germany,
a
large
annual
payment
from
it
to
the
victorious
Allies.
(Many
historians
believe
this
indemnity
played
a
role
in
destabilizing
financial
markets
in
the
interwar
period
and
even
in
bringing
on
World
War
II.)
In
the
1920s,
economist
John
Maynard
Keynes
and
Bertil
Ohlin
had
a
spirited
debate
in
the
Economic
Journal
over
the
possibility
that
the
transfer
payment
would
impose
a
“secondary
burden”
on
Germany
by
worsening
its
terms
of
trade.
Use
the
theory
developed
in
this
chapter
to
discuss
the
mechanism
through
which
a
permanent
transfer
from
Poland
to
the
Czech
Republic
would
affect
the
real
zloty/koruna
exchange
rate
in
the
long
run.
7. Continuing
with
the
preceding
problem,
discuss
how
the
transfer
would
affect
the
long-­-run
nominal
exchange
rate
between
the
two
currencies.
8. Can
you
suggest
an
event
that
would
cause
a
country’s
nominal
interest
rate
to
raise
and
its
currency
to
appreciate
simultaneously,
in
a
world
with
perfectly
flexible
prices?
Register
in
the
United
States’
Real
and
Financial
Flows
Matrix
the
following
situation.
The
European
Central
Bank
decides
to
increase
the
real
money
supply
while
European
governments
decide
to
expand
their
expenditures
and
the
private
sector
in
Europe
maintains
their
level
of
expenditure.
Assume
that
international
transactions
are
made
in
Euros
but
Americans
if
they
have
any
Euro
they
exchange
it
for
dollars
at
the
Fed.