Lecture set 4

Question 1

Name three monetary factors.

Answer 1

R, R* and Ee

Question 2

If global markets are perfectly competitive, all G and S are measured in the same currency, thus PPP, show it.

Answer 2

P=EP*

Question 3

WHat if P>EP*?

Answer 3

Buy in P* ajd sell in P

Question 4

What does LOOP imply?

Answer 4

E=P/P*

Question 5

What is the equation for real exchange rate q?

Answer 5

q=EP*/P

Question 6

Absolute PPP implies that?

Answer 6

q=+1, the weighted average price should be equal.

Question 7

What does it mean if q>1

Answer 7

Foregin goods and services more expensive and domestic cheap.

Question 8

Say E increase in the short run, what happens to q?

Answer 8

q increase too if prices stay fix which they do in the short run.

Question 9

Relative PPP focus on what as difference to absolute PPP

Answer 9

absolute PPP focus on price levels as relative PPP focus on price changes

Question 10

What does relative PPP imply?

Answer 10

If P/P increase over time but P increase faster, means foreign inflation is higher and nominal E will go down proportional to the P* increase. Given a fix q.

Question 11

Is relative PPP having a fix q?

Answer 11

Yes, q is constant

Question 12

P*/P will be matched by E and q will be?

Answer 12

Constant, thus qe=q

Question 13

According to APPP, what is q?

Answer 13

q is equal to 1, thus stronger assumption.

Question 14

The basic monetary model consists of two equations, which?

Answer 14

E=P/P* -(Ms)

P=Ms/L(R,Y) -(Md)

Question 15

Changes in R & Y affect E only directly through their effect on?

Answer 15

Money Demand

Question 16

In the short run, if R goes up, E goes down. But in the long run, if R goes up, E goes up too, why?

Answer 16

Because Prices are sticky in the short run, in the long run P can freely adjust.

Question 17

If the growth rate of Ms increase, what happens in the long and short run for inflation?

Answer 17

Inflation goes up in the long run, in the short run expected inflation goes up, thus R increase in the long runt because of fisher effect

Question 18

In the general monetary long run model we assume that (3 things)

Answer 18

P is flexible
q is flexible(contrary to the PPP conditions)
Home bias

Question 19

What is home bias?

Answer 19

Home bias is when domestic consumers are very protectionistic and prefer domestic goods over foreign

Question 20

What changes and changers not q in the general monetary long run model?

Answer 20

Monetary shocks, Ms, and L(R, Y) will not change q, but non monetary shocks, thus D and Y will change q, and both types of chocks can affect short-run expectations Ee, qe and pi e.

Question 21

If PPP holds what is true about q?

Answer 21

Then qe=q and R-R*=pi e -pi e *

Question 22

If PPP does not hold, what is true about q?

Answer 22

Then R-R*=(qe-q/q)+(pi e -pi e *)