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International Economics, 2020-21 - Assignment 2 Questions: at The Start of Each Assignment

1) The monetary model focuses on long-run exchange rates based on purchasing power parity and analyzes changes in money supply levels and growth rates as well as fiscal policy. It explains price changes and expected inflation in the long-run. 2) The money market and foreign exchange market model focuses on short-run exchange rate movements and analyzes changes in money supply levels and growth rates as well as monetary policy. It explains price changes, expected inflation, and expected exchange rates in the short-run. 3) An interest rate decrease leads to depreciation in the money market model through capital outflows but appreciation in the monetary model through higher domestic prices and inflation expectations.

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92 views3 pages

International Economics, 2020-21 - Assignment 2 Questions: at The Start of Each Assignment

1) The monetary model focuses on long-run exchange rates based on purchasing power parity and analyzes changes in money supply levels and growth rates as well as fiscal policy. It explains price changes and expected inflation in the long-run. 2) The money market and foreign exchange market model focuses on short-run exchange rate movements and analyzes changes in money supply levels and growth rates as well as monetary policy. It explains price changes, expected inflation, and expected exchange rates in the short-run. 3) An interest rate decrease leads to depreciation in the money market model through capital outflows but appreciation in the monetary model through higher domestic prices and inflation expectations.

Uploaded by

AnthonyWittendorp
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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International Economics, 2020-21 – Assignment 2 questions

At the start of each assignment:

Instructions for submission (not adhering to them means that your assignment work will not be
graded):

1. The assignment must be done by two or three students and submitted electronically (also to
check for plagiarism).

2. Make sure you specify which assignment it is.

3. The assignments must not be handwritten, but typed out.

4. List the group members in the top left corner of your assignment alphabetically and in a
format corresponding to this example:
Bakker, Martje de, s7654321
0’Connor, James, s7655554
Puk, Pietje van, s1234567

5. Only the first one in the alphabet of your group can and must submit the assignment
electronically. So, in our case, only Martje de Bakker.

6. Start the name of the electronically submitted assignment with the surname of the first one in
your group. So in our case, it would become: “Bakker, ...”.

7. Handmade graphs may be used. All graphs/figures/tables must, however, be placed where
they belong, i.e. not added as an appendix at the end.

8. For each question, write down the question number (“Question 1”, “Question 2”, etc.) and
then give your answer. So do not repeat the question text.

1
Assignment 2: Comparison of the monetary model
with the money market and foreign exchange market model

Question 1:

Instructions: The filled in table below should be on one page and not exceed one page. For
some cells, it suffices to use one to five keywords; more than 10 keywords are never
necessary.

Fill in the table below to indicate the differences of the monetary model (long run exchange
rate model based on PPP) on the one hand and the money market and foreign exchange
market model on the other hand with respect to the following issues:

a) Which markets (foreign exchange / money / goods) are involved? Can we analyse
changes in money supply levels and/or changes in money supply growth rates and/or
fiscal policy? State your answers by means of keywords.

b) What is the time horizon of effects and analysis (short/long run,


temporary/permanent)? State your answers and indicate why by means of keywords.

c) Consider price changes, expected inflation and expected exchange rate. Are these
variables explained by the analyses? State your answers and indicate why, where
appropriate, by means of keywords.

Monetary model Money market and foreign


exchange market model
a) Scope:
Foreign exchange / money / goods
market
Monetary policy: levels / growth
rates
Fiscal policy

b) Time horizon:
Short/long run
Temporary/permanent

c) Variables explained:
Price changes
Expected inflation

Expected exchange rate

2
Question 2:

Instructions: Limit your answer on parts a) and b) of the question together to 120 words in
total. Wherever possible, use keywords and arrows for increasing () and decreasing () and
leading to (). Make sure your answer is clear, nonetheless.

An interest rate decrease produces a depreciation in the money market and foreign exchange
market model, but an appreciation in the monetary model.

a) compare the reasons for an decrease in the interest rate in both models;
b) explain the mechanisms leading to the difference in results in both models.

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