How might trade barriers affect the short run current exchange rate?
(a) How might trade barriers affect the short run current exchange rate?
(b) What were the Russian capital controls imposed in Spring 2022, and why did they help support the ruble? Demonstrate on a graph of the Russian asset market. HINT: put the US-ruble exchange rate on the y-axis and Russian denominated assets on the x-axis.
(c) What’s the difference between a sterilized and un-sterilized foreign exchange intervention?
2. Suppose a US firm offers a $105 face value bond, whose current price is $100. The current US-Yuan exchange rate is 8 (8 Yuan to buy 1 dollar).
(a) How much Yuan does this bond currently cost?
(b) If you expect the exchange rate to be 8.05 tomorrow, do you expect the Yuan to appreciate or depreciate? What is your expected return?
(c) If you hear that China has been joined the WTO and is preparing to increase exports to the US, would you expect the exchange rate to increase to 8.1 or fall back to 7.9? Why? What would be the expected return then? Remember: This is a dollar denominated bond.
(d) Would your answer in part (c) make you more or less likely to buy this bond?
3. Consider our 3-period monetary policy model from Unit 2 (starting on slide 39). Remember that in the model we have downward nominal wage rigidity (nominal wages can’t fall). Let σ = .5 and γ = 1. Assume the current price level is P1 = 1 and the firm’s price markup is 1.1 (so the nominal wage, W1 = real wage (W1 /P1 ) ≈ .9).
(a) Start with the household’s labor supply condition derived on slide 43. Under full employment, what must labor supply be equal to? When Yt = Lt and ct = Yt , what must labor demand be equal to? Find the level of consumption/output consistent with full employment. 1
(b) Now take the household’s first period Euler equation Suppose β1 = .98. Suppose further than households know that P2 = 1.1 and c2 = .8. Solve for the nominal interest rate, i1 that results in full employment.
(c) Now suppose households become nervous and their discount rate, β1 rises to 1.3. What is the i1 associated with full employment now? Is this feasible?
(d) Has anything happened (yet) to the domestic price level? Given your answer, would we expect any changes in the current exchange rate between this country and its neighbor? HINT: Think about how the relative price level affects the future exchange rate.
(e) Can the central bank use any other tools to boost demand? What will that do to prices tomorrow P2 ? What would the effect be on the future exchange rate? The current exchange rate?
Collepals.com Plagiarism Free Papers
Are you looking for custom essay writing service or even dissertation writing services? Just request for our write my paper service, and we'll match you with the best essay writer in your subject! With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers.
Get ZERO PLAGIARISM, HUMAN WRITTEN ESSAYS
Why Hire Collepals.com writers to do your paper?
Quality- We are experienced and have access to ample research materials.
We write plagiarism Free Content
Confidential- We never share or sell your personal information to third parties.
Support-Chat with us today! We are always waiting to answer all your questions.
