5. Suppose the Malaysian government announced that the country will move to a fixedexchange rate system, and set the fixed exchange rate at 4 Ringgit to 1 USD. However,suppose that the true equilibrium exchange rate is at 3 Ringgit to 1 USD.Draw an assets-based model of demand and supply depicting the situation above. In thissituation, is the Ringgit overvalued or undervalued? Explain how the country's centralbank would use reserves in order to maintain the fixed exchange rate.

If the true equilibrium exchange rate is at 3 Ringgit to 1 USD, but the government has set the fixed…

Answered: 5. Suppose the Malaysian government…

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter19: The International Monetary System: Order Or Disorder

Section: Chapter Questions

Problem 8DQ

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N N QUESTION 3 Consider the exchange rate between U.S. Dollar and Mexican Peso: USD/MXN. Initially, the supply curve for USD is 100+ e bln dollars per week and the demand curve is 140-e bln dollars per week. There is a financial crisis in Mexico and the government fears that it may lead to capital outflows that would make the crisis even worse. They decide that if Mexican Peso depreciates by more than 20%, the central bank will step in and fix the exchange rate. As the crisis unfolds the demand for the U.S. dollars increases to 142-e and the supply of dollars falls to 99+ e How should the central 'N' bank of Mexico react to this change? N O A. start selling U.S. dollars to support the exchange rate O B. start buying U.S. dollars to support the exchange rate O C. reduce money supply in the economy O D. do nothing
1. Describe the law of association. What are its assumptions? 2. What is the difference between “fixed” and “floating” exchange rate regimes? 3. What are the economic consequences of money “hoarding”? 4. Briefly describe the process by which money emerges from a state of barter.
2. Suppose the central bank of a country is worried about the economy overheating so it enacts a contractionary monetary policy (reducing the money supply): 2A. Assuming the country has a fixed exchange, illustrate the effects of the contractionary monetary policy with both an IS-LM-BOP graph and a foreign exchange market graph for the foreign currency, explaining which curve(s) shift and why. Explain the effects on GDP, interest rates, and the current account and capital account. 2B. What would the central bank have to do to maintain the fixed exchange rate? Illustrate this on the foreign exchange graph in 2A. (You do not need a new graph). 2C. Define sterilization and explain what the central bank would have to do to sterilize the intervention. Show on your graphs the GDP, interest rate, and exchange rate with sterilized intervention (label as point 1 on the graphs from 2A). 2D. Suppose instead the central bank does not sterilize the intervention. Explain what would happen and…
(b) What is the J-Curve effect and how is it related to M-L condition? (c) In this part, you are to RELATE the M-L condition to the shape of the demand and supply of the currency, below. Suppose the foreign exchange market is represented by the following diagram where there are only two countries, Canada and Euro zone, trading goods and services with each other. 터CS/E 1.8 DE S€ 1.4 1.0 QO Q€ (D€): demand for euro by Canadians = stands for Canada's payments for its imports of goods and services, and (S€): supply of euro by Europeans = stands for Canada's receipt from its exports of goods and services. For simplicity, there are no capital/financial account transactions. Show that the M-L condition is satisfied in this diagram.

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