Textbook Notes (369,072)
MGEB06H3 (41)
Chapter

Tutorial_Solution_(Ch_12).doc

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Department
Economics for Management Studies
Course Code
MGEB06H3
Professor
Jack Parkinson

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MGEB06 Tutorial Questions (Chapter 12) Answer Key Question 1 Part (a) Suppose money demand falls, L(r, Y ) ↓: • L(r, Y ) ↓ ⇒ LM shifts to the right to LM . W • The economy moves to point C such that r < r = T ⇒ capital outflows ⇒ DC depreciates. • DC depreciates ⇒ NX ↑ ⇒ IS shifts to the right to IS . • Point B is the SR equilibrium: Y ↑ to Y1 r = r = r T Conclusion: The central bank does not need to change MS because flexible exchange rate W ensures r = r = T automatically. r LM 0 LM 1 A B r = rT C 0 1 IS IS Y Y Y 1 FE B06 Tutorial Question (Chapter 12) Answer Key 1 Part (b) Suppose money demand falls, L(r, Y ) ↓: • L(r, Y ) ↓ ⇒ LM shifts to the right to LM . W • The economy moves to point C such r < r = rT⇒ capital outflows ⇒ DC depreciates. • DC depreciates ⇒ NX ↑ (deviate from target level) ⇒ IS shifts to the right to IS . • Point B is the equilibrium: Y ↑ to Y1 r = r = T NX ↑ • To keep NX at the target level, the central bank would decrease MS ⇒ LM shifts to the left and back to LM . W • The economy moves to point D such that r > r = rT⇒ capital inflows ⇒ DC appreciates. • DC appreciates ⇒ NX ↓ back to target level ⇒ IS shifts to the left and back to IS . • Point A is the SR equilibrium: Y = Y FE r = r = T Conclusions: The central bank decre
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