ECON 345 Final: ECON 345 Final Exam Spring 2016
Document Summary
No credit without explanation (8 points each): fiscal expansion in the usa causes output in china to increase. Fiscal expansion in the usa will raise us interest rates. To keep its exchange rate xed, china must raise its interest rate. This will depress spending and output in china. (if they try to draw a graph using the dd-aa model, it"s a little tricky, since it puts e on the vertical axis. An increase in r shifts china"s aa to the right. China must sell fx reserves to keep its currency from depreciating. If interest rates didn"t a ect spending, that would be the end of the story. But when they do, then dd shifts left too, and so aa must continue shifting left until it intersects the new dd. They do not need to draw a graph for full credit: currency crises are caused by inconsistent macroeconomic policies. According to the 1st generation model, they are.
