General Exam Questions

Question 1

Expansionary monetary policy: Consequences for interest rates and effects caused for value of domestic currency

Answer 1

If Keynesian increases M:
-Interest rates: Neoclassical>Keynesian
-Forex market effects: Cap Im + S of forex down
Cap Ex + D for forex up
–> Excess demand for foreign currency –> own currency loses value

Question 2

Expansionary monetary policy: Adapt to new situation (change in currency’s value) under floating exchange rates

Answer 2

Cap Im + S of forex up
Cap Ex + D for forex down

Good Im + D for forex down
Good Ex + S of forex up

Until Supply=Demand of foreign currency
–> Equilibrium

Question 3

Expansionary monetary policy: Adapt to new situation (change in currency’s value) under fixed exchange rates

Answer 3

• Value of currency continues to slightly depreciate
• Until central banks have to intervene
• Intervention: Sell foreign currency so that domestic money supply goes down

Question 4

Expansionary monetary policy: Economic effects under floating exchange rates

Answer 4

• Net Exports increase
• Macroeconomic demand Yd and Y increase
• Positive multipliers
• Macroeconomic demand overall strengthened

Question 5

Expansionary monetary policy: Economic effects under fixed exchange rates

Answer 5

-Domestic money supply goes up
-M-i-effect: interest rates increase,
Cap Im + s of forex up
Cap Ex + D for forex down
-M-Y-effect: Investments decrease, negative multipliers, D for forex decreases
–> If both short run oriented: Neoclassical intervenes and buys foreign currencies
-M-P-effect: Inflation rate decreases,
Goods Im + D for forex down
Goods Ex + S of forex up
–> If both long run oriented: Keynesian intervenes and sells foreign currencies

Question 6

Expansionary fiscal policy in recession: Economic effects

Answer 6

-Goods market: Income increases, positive multipliers, macroeconomic demand Yd and Y increase
-Monetary market: Monetary demand increases so interest rates increase –> Investments decrease and negative multipliers, so positive goods market effect dampened
-International capital market: interest rates increase
Cap Im + S of forex up
Cap Ex + D for forex down
-Foreign exchange market: forex supply up and demand down –> Appreciation of domestic currency, net exports decrease, positive effect dampened
-Only FIXED exchange rates:
-Effect of necessary interventions:
Central banks buys currency, M goes up and interest rates down, positive multipliers, further increase of Yd and Y