Book: Exchange Rate, Output And Interest Rate Flashcards
Does the exchange rate regime affect the effects of monetary and fiscal policy
Yes
Give the function for equilibrium in the open goods market
Y=C(Y-T)+I(Y,r)+G-IM(Y,e)+X(Y*,e)
+. + -. + +. + -.
What is the function for net exports
NX(Y,Y,e) = X(Y,e) - IM(Y,e)/e
- + -
What effect does higher interest rate or exchange rate have on output
A negative effect
How foes the interest parity condition affect exchange rate
E=(1+i/1+i)E(t+1)
How foes an increase in domestic interest rate affect the exchange rate
It increases it
How foes an increase in foreign interest rates affect the exchange rate
It decreases it
How does an increase in expected future exchange rate affect the exchange rate
It increases it
What is the interest parity condition
That the return on local bonds must be the same as the return on foreign bonds to be competitive
How does raising the interest rate affect the open economy
It decreases investment and net exports by increasing the exchange rate
What is the Mundell Fleming trilemma
That a nation can only choose two out of free capital mobility, exchange rate management and monetary authority
What is a peg and a crawling pegged exchange rate
A peg is a fixed exchange rate compared to another currency like the euro in france affrique or the dara. A crawling peg is a government controled movement compared to another currency
How is pegging achived
By giving up monetary policy and simply copying the nominal interest rate if another nation
What are the detrimental effects of pegging a currency
It gives up the ability to change the exchange rate and thus a tool to correct trade imbalances. It gives up up control over the interest rate and thus it often moves against the interest of the nation and it looses one of the tools it can use to reduce the detrimental effects of monetary policy
How can a peged central bank increase interest rates
By having large reserves of foreign currency and limited capital mobility it can change the interest and simultaneously keep the exchange rate pegged by trading in the foreign currency for a while and rely on market slowness not to move in the opposite directions too fast
