Asymmetric blade effect diagram

1.The interest rate on a One-year bank deposit in Brazil is 6%.  In the US it is 2.2%.  The Exchange rate is 3.9 reals/$.  If an American investor deposited $1,000 in a Brazilian bank for one-year, then Brought the funds back to US, what would his/her rate of return be if (a) the real appreciates to 4.1/$, (b) the real depreciates to 3.5/$, (c) the real/$ Exchange rate doesn’t change? 

1000*3.9 = 3900*(1+0.06)= 4134

(a)If real appreciate to 4.1 Real/dollar

he gets = $4134/4.1 = $1008.29

(b) depreciation to 3.5 Real/dollar

He gets = 4134/3.5 =$ 1181.14

(c) at the constant rate:

He gets = 4134/3.9 = $1060

2.What does it mean to say The macro-economy is in internal balance?  In external balance?

By internal balance it means that the unemployment Is low and the economy is at the full employment or potential or natural level Of output. By external balance it means that the current account and capital Account balance and the economy has a balance of payment = 0.

3.What is an unemployment equilibrium?

This type of unemployment happens When the labor market is at equilibrium, meaning jobs exist but People are either unable or unwilling to take the jobs that exist.

4. The IS curve.

a.What does the IS curve Represent? 

b.Why is it downward Sloping? 

c.If The economy is operating at a point to the right of the IS curve, explain why The product market is not in equilibrium. 

d.How will expansionary Fiscal policy shift the IS curve?  Contractionary fiscal policy?  Expansionary Monetary policy?

e.What are two other factors That will shift the IS curve to the right?  To the left?

IS curve Mathematically shows the demand curve which is the function of Consumption, Government Spending, Investment and Net Export i.E IS = f(C, G, NX, I). IS Curve shows the Goods market. IS curve shows the relation between Real Rate of Interest and Real Output(Income and Employment). It is downward sloping because If real interest rate increases output decreases and vice-versa and if we join The points of different interest rate and output we will get a downward sloping IS curve.

(c) Product market is not in Equilibrium due to excess supply of goods. If an economy is operating to the Right of curve then there is an excess supply of goods for particular rate of Interest which further leads to decrease in inventories by firms and it will Ultimately decreases the real output so Employment also decreases.

(d) Expansionary Fiscal Policy Helps the government to increase the real output at particular rate of interest Rate. Let us suppose that due to government spending "G" increases so It will shit the IS curve rightward so 'Y' real output increases and Employment. It is generally done in the recession to boost the Aggregate Demand. Contractionary Fiscal policy is just the opposite of Expansionary Fiscal Policy and it will shift the curve to the left and it is generally done In boom. By increasing the Government Spending and Consumption IS curve can Shift to rightward side. By decreasing the Government Spending and Consumption, IS curve can shift leftward side. There is no effect of expansionary monetary Policy on IS curve.

5.Answer the same questions For the LM curve (except in part b, substitute upward for downward and in part C, the money market for the product market).

6.The FE curve. 

a.What does the FE curve Represent? 

b.What is the difference Between a steeply sloped or shallowly sloped FE curve?  How would you interpret that?

c.If The economy is operating to the right of the FE curve, what does this mean?

d.What are two factors that Will shift the FE curve?

7.In the diagram I will draw On the board, where is equilibrium Y?  Where is the country in internal balance?  External balance?

8.Draw a diagram where the IS, LM and FE curves all intersect.  At This point, is the economy in external balance?  In internal balance?

9.The government increases Its fiscal deficit (raising G and/or cutting T).  Draw this on the same diagram.  Now is the country in internal balance?  External balance?

When government raises their Spending or cut taxes, AD shifts to its right from AD to AD1 and AS remains the Same which shifts the output level to Y1 from Y and price level to P1 from P.

Internal balance says that a Economy is in full employment level but this is not the case here output level Have risen here.

External balance says that a Country can have deficit or surplus as per economic conditions. Thus here Economy is in external balance. 

10.The Central Bank increases The money supply.  Draw this on the Original diagram.  Is the country in Internal balance?  In external balance?

External balance Says that the export of a country is approximate equal to import of country. It Comes into place when one of either exports or imports have large margin than The other. Here rise in money supply shifts the LM curve to its right which Bring the interest rate down to i1 from i and output level rise from Y to Y1. Here the rise in AD could raise the exports but the result of reduced interest Rate will also take the imports up. Thus they are approximately equal. So, it Can be said that economy is in Internal balance.

11.For both questions #8 and #9, explain the sequence of events that will occur in these scenarios if a Country has a fixed exchange rate.  Does It matter if the FE is more vertical or more flat?

12.Use your answer to #10 to Explain why independent monetary policy is impossible with capital mobility and A fixed exchange rate.

13.Why might countries with Internationally important currencies face a flatter FE curve?

Flatter FE curve means = It typically shows that the traders and Investors have macroeconomic concerns because,when the long term interest rates Falls down or drop down more then short term interests rate or in another terms When there is increase in short term interests rate more then long term Interests rate , leads to adverse shift of interests rate of market .

Many might countries with Internationally important currencies face a flatter FE curve because flatter FE Curve  go straight and take steep bend towards right at a normal Situation but when this curve get inverted its position which means currency Get weaken made the situation for might countries currency face flatter FE Curve

14.Such countries can use a Fiscal/monetary mix to attain internal balance.  Explain.

15.Countries whose currencies Are not used internationally must adjust or finance in the event of a deficit In their current account.  How can they Finance a CA deficit if their assets are of interest to private investors?  If their assets are not of interest to Private investors?

The countries can finance a Current account deficit if their assets are of interest to private investors by Increasing the sale of its assets to foreign investors. This will increase Inflow of capital in the nation when the foreign nations will invest their Money in the economy and thus will help in financing a deficit in their current Account.

If the assets are not of interest To private investors then it is advisable for the economy to reduce its export Price which will help in increasing the level of exports of the nation by Making exports attractive and thus leading to fall in current account deficit

16.Why did French economist Reuff complain in the early 1970s that only the US could run “deficits without Tears”?

Reuff had compared Bretton Woods To a system with his tailor in which the money he paid for a new suit is Immediately returned to him so that he might order another. Under the system, The countries had agreed to tie their exchange rates to the USD. Nations had also Agreed to buy and sell USD to maintain their currencies within 1% of the fixed Agreed rate.

This led to a golden age for US Dollars as the country could run balance of payments deficits without any Counter measure to control it.

17.What is the J-curve effect In international finance?  Why can this Make it difficult to achieve external balance even with an adjustable fixed Exchange rate? 

The J-curve effect in international finance means =when in the economy initially trade is worsens Because of the devaluation of prices happens which leads to increase in price Of imports in short run ,but then in long run prices of the imports Get balanced which leads to no more trade deficit

adjustable fixed exchange rate means = when all the currencies get fixed to the certain level against some another Strong currency.

The Effect of J-curve make difficult to achieve external balance even with Adjustable fixed exchange rate because initially due to the very costly imports And due to cheaper exports leads to big trade deficit which Results in the monetary policy of deficit country not get Free to conduct from rest of world by the central bank.