开放经济代写 Open Economy代写

Econ G25T: Open Economy Macroeconomics

Problems and Discussion Questions #3

开放经济代写 1. By definition, the country faces a perfectly elastic demand curve for its exports and a perfectly elastic supply curve of imports.

1. 开放经济代写

Consider a small open economy. By definition, the country faces a perfectly elastic demand curve for its exports and a perfectly elastic supply curve of imports.

The economy’s balance of trade can be written:

B=P_XX(P_X) – P_MM(P_M)

(a) Derive an expression for the effect of a depreciation of the exchange rate on the balance of trade. Remember that P_X = SP_X* and P_M = SP_M*, and since we are considering a small open economy P_X* and P_M* should be regarded as exogenous. The function X(P_X) can be interpreted as a supply function, giving the supply of exports as a function of the (domestic currency) price of exports, whereas M(P_M) is a demand function, giving the demand for imports as a function of their domestic currency price. The expression you derive should contain both the supply elasticity of exports and the demand elasticity of imports.

(b) Using the expression derived in (a), discuss the effects of a depreciation of the exchange rate on the balance of trade. Consider the case first of all where the balance of trade initially balances and, secondly, where initially there is a trade deficit.

2. 开放经济代写

In a small-country Mundell-Fleming model with perfect capital mobility and flexible exchange rates, discuss the effects of an expansionary rest of world fiscal policy on output and the exchange rate. Illustrate your answer diagrammatically. (Assume that the effects of the rest of world fiscal policy can be captured by a closed economy IS-LM framework applying at the world level.)

3.

In a small-country Mundell-Fleming economy with imperfect capital mobility and flexible exchange rates, discuss the effect of an increase in government spending on output, the exchange rate, and the domestic interest rate. Illustrate your answer diagrammatically.

Under what conditions will the exchange rate appreciate and when will it depreciate?

4.Two-country Mundell-Fleming. 开放经济代写

Consider the following model:

y = as + g,   (2)
y* = -as + g*,   (3)
m = -br + cy,   (4)
m* = -br* cy*,   (5)
r = r*.   (6)

The terms are defined as follows: y (y*) is domestic (foreign) income, m (m*) is the domestic(foreign) money supply, s is the domestic exchange rate (domestic currency price of foreign exchange), r (r*) is the domestic (foreign) interest rate, g (g*) is domestic (foreign) government spending, and a, b and c are positive constants.

Equations (2) and (3) are goods market equilibrium conditions for each country, respectively. For simplicity, there are no interest rate effects on aggregate demand and no direct spillover effects from one country’s output to the other’s. Equations (4) and (5) are (conventional) money market equilibrium conditions; each country’s price level is constant and normalised to unity. With a flexible exchange rate, money supply equals money demand for each country separately, and each country’s money supply is exogenous. So y, y*, r, r* and s are the endogenous variables, whereas m, m*, g and g* are policy instruments. Note the symmetry assumption – the countries are effectively the same, and are the same size (so the small country assumption is relaxed).

(a) 开放经济代写

Solve the system to derive expressions for y and y* in terms of the parameters and policy instruments. (Hint: solving the system should not be too difficult – find a way of eliminating r, then a way of eliminating s, and you should then have a two equation system in y and y* that should be easy to solve.)

(b)

Using your answers to (a), derive expressions for r and s in terms of the parameters and policy instruments.

(c)

Discuss the effects of domestic and foreign monetary policy (i.e. changes in m and m*) on domestic income. Include in your discussion the role of interest rate and exchange rate changes, using the results derived in answering part (b) of the question. Do either of your results strike you as surprising? Explain.

(d)

Discuss the effects of domestic and foreign fiscal policy (i.e. changes in g and g*) on domestic income, again including a discussion of the role of interest rate and exchange rate changes.

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