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Question 1

Describe the AA-relation?

Answer 1

Short term equilibrium in asset markets. If Y↑ then E↓. AA curve shows combinations when Y ↑ E ↓

Question 2

What is the AA asset market equilibrium logic?

Answer 2

Y→ R → E

Question 3

What is the DD equilibrium in the product market logic?

Answer 3

E → D → Y

Question 4

Where do we find the Short run equilibrium in all markets?

Answer 4

where DD and AA intersect. It determines the short-term nominal exchange rate.

Question 5

What happens If there is temporary expansionary monetary policy?

Answer 5

Then there is a temporary increase in the money supply and AA curve shifts up.

Question 6

What happens If there is temporary expansionary fiscal Policy?

Answer 6

DD shifts out.

Question 6

What does expansionary monetary policy do In the short term?

Answer 6

It leads to nominal depreciation and higher GDP.

Question 7

What does expansionary fiscal Policy do In the short term?

Answer 7

It leads to a nominal appreciation and increased GDP, as long as the CB wants this so they keep the money supply constant.

Question 8

What is a Floating exchange rate?

Answer 8

Then Market determines nominal exchange rate (interest rate parity condition). Higher domestic interest rates lead to nominal appreciation.

Question 9

What is a Fixed exchange rate?

Answer 9

Official target for the price of the currency is announced. CB must act so that it is at this level today and in the future foreign exchange market. (buy more SEK if market sells more)

Question 10

What is a Hybrid form of the exchange rate?

Answer 10

Pegged floating exchange rate. CB intervenes from time to time to stabilize the exchange rate.

Question 11

When can you not use Monetary policy?

Answer 11

When you have a fixed exchange rate.

Question 12

What happens If fiscal policy is used when you have a fixed rate?

Answer 12

Then there is no change in exchange rate but large effects on GDP.

Question 13

What is devaluation?

Answer 13

When you Write down the value of the currency to announce an increase in E. It’s an act to change the exchange rate today. If it’s fully credible it happens immediately but there is more likely that CB has to sell of the currency.

Question 13

What are the Effects of devaluation?

Answer 13

• There is a new value of the currency so AA shifts,
• It favours net exports and thus aggregate demand and GDP.
• There is a risk that the market thinks it will devalue again, and the expectations that the E rise Can make it so.
• CB then has to support buy SEK which raises domestic interest rate.