Problem Set 2
1 . Suppose the Chinese economy recovered more quickly than the US economy from our current global recession. Illustrate and describe how this asymmetric recovery across countries will impact our simultaneous equilibrium model from the perspective of the US. Be sure to highlight the changes in the rate of return on $-denominated assets, the rate of return on yuan (CNY)-denominated assets, and the exchange rate ($/CNY).
2. Show the effects of expansionary fiscal policy (e.g. an increase in government expenditure) on our simultaneous equilibrium in the money and foreign exchange markets. Where does the shock originate? What is the ultimate impact on the value of the domestic currency?
3. Illustrate and describe the effects in US asset markets of the European Central Bank (ECB) implementing expansionary monetary policy in response to a recession. What are the effects on simultaneous equilibrium in the money and foreign exchange markets from the US perspective? How does the ECB create a change in the European money market? What happens to the rates of return on deposits? What is the ultimate impact on the USD/EUR exchange rate?
4. The policy scenario described in question 3 is a response to short-run fluctuations. Does that result match up with the long-run response of e? Illustrate and describe the ultimate long-run response of the exchange rate to such a policy. Is there a disconnect between the classical long-run concept of the Quantity Theory of Money and the ultimate change? Why or why not?
5. Since the beginning of 2021, the dollar has been steadily appreciating in value relative to the Japanese Yen.
a) How would this impact the competitiveness of US automotive firm General Motors competing with Japanese automotive firm Toyota in global markets?
b) How would the Bank of Japan implementing expansionary monetary policy impact the competitiveness of Toyota? How do you know?