The Foreign Exchange Market
The Foreign Exchange Market Discussion
SP Final- Monetary Economics
For exercises in which you are asked to illustrate using a graph, please utilize the templates associated with the specific market in question (i.e. market for bonds, market for bank reserves, AD/AS framework, etc.). These are provided with the course documents. Place the new curves in the appropriate position on the graph to illustrate the effect of any shifts.
Chapter 17: The Foreign Exchange Market
Exercise #1:
Given the actions of the Federal Reserve in recent months, what would you expect to happen to the value of the dollar in the coming months? Illustrate the effects in the market for foreign exchange, analyzing the euro/$ exchange rate.
Reference this article for supporting information: “US dollar hits highest level in more than 2 years.”
Exercise #2:
If the public believes that the official Brexit will cause a recession and prompt swift action from the Bank of England in the near future, what will happen to the value of the pound in the short run? Illustrate using the foreign exchange market with the British pound as the domestic currency (i.e. $/£).
Given the change in interest rates and in the $/£ exchange rate, explain what we would expect to happen to aggregate demand in the U.K. Illustrate the effect on the AD/AS framework for the U.K. What happens to equilibrium output and inflation?
Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
Exercise #2:
Explain the Taylor rule, including the formula for setting the federal funds rate target, and the components of the formula. If the Fed were to use this rule, how many goals would it use to set monetary policy?
Exercise #3:
What does the Taylor rule imply that policymakers should do to the fed funds rate under the following scenarios?
Unemployment falls due to a tax cut.
An oil price shock causes the inflation rate to rise by 2% and output to fall by 2%.
Potential output rises while actual output remains unchanged.
The Fed revises its inflation target downwards.
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