Scribd Logo
Upload

Welcome to Scribd!

  • 17 views

    Tutorial 3 - IS LMopen

    Uploaded by

    Slippy G
    This document contains a tutorial with questions and solutions related to macroeconomics. It includes 4 questions about uncovered interest rate parity, the effects of monetary policy on exchange rates and capital flows, and using the IS-LM model to analyze the effects of monetary policy in closed and open economies. The document provides context and background for students answering macroeconomics questions.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Tutorial 3 - IS LMopen

    Uploaded by

    Slippy G
    17 views2 pages
    This document contains a tutorial with questions and solutions related to macroeconomics. It includes 4 questions about uncovered interest rate parity, the effects of monetary policy on exchange rates and capital flows, and using the IS-LM model to analyze the effects of monetary policy in closed and open economies. The document provides context and background for students answering macroeconomics questions.

    Original Description:

    Tutorial 3_IS LMopen questions

    Original Title

    Tutorial 3_IS LMopen

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document contains a tutorial with questions and solutions related to macroeconomics. It includes 4 questions about uncovered interest rate parity, the effects of monetary policy on exchange rates and capital flows, and using the IS-LM model to analyze the effects of monetary policy in closed and open economies. The document provides context and background for students answering macroeconomics questions.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    17 views2 pages

    Tutorial 3 - IS LMopen

    Uploaded by

    Slippy G
    This document contains a tutorial with questions and solutions related to macroeconomics. It includes 4 questions about uncovered interest rate parity, the effects of monetary policy on exchange rates and capital flows, and using the IS-LM model to analyze the effects of monetary policy in closed and open economies. The document provides context and background for students answering macroeconomics questions.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    Tutorial 3 for 5QQMN937 - Macroeconomics

    -
    Questions and Solutions
    Michele Piffer∗

    Question 1
    The uncovered interest parity states that the equality
    Et
    (1 + it ) = (1 + iw
    t ) e
    (1)
    Et+1

    must hold, with it the domestic nominal interest rate, iw


    t the foreign nominal interest
    rate, Et the nominal exchange rate (defined as the ratio of units of foreign currency
    e
    per one unit of domestic currency), and Et+1 the nominal exchange expected at time
    t for period t + 1.

    a) Suppose iw = 0.02 and Et = 3. Suppose the domestic currency is expected to


    (nominally) depreciate by 5%. Compute the effective nominal return that a
    domestic resident expects to earn if he invests abroad;

    b) suppose instead that the domestic currency does not depreciate by 5% as ex-
    pected, but it appreciates by 2%. Compute the effective nominal return that
    a domestic resident earns if he invests abroad.

    ∗
    King’s Business School, King’s College London, UK. Email: [email protected], personal
    web page: https://sites.google.com/site/michelepiffereconomics/.

    1
    Question 2
    Select the correct words in italics:

    A domestic monetary policy expansion takes the form of an increase/a decrease


    in the domestic interest rate. This can lead to an increase/a decrease in the cap-
    ital account, which is defined as the difference between capital inflows and capital
    outflows/capital outflows and capital inflows. In a flexible exchange rate regime,
    the change in the capital account can lead to an appreciation/a depreciation of the
    domestic currency, which in turn increases/decreases exports, lowering/stimulating
    domestic aggregate demand.

    Question 3
    Select the correct words in italics:

    A sudden improvement in the economic prospects of the domestic country can


    lead to a capital inflow/capital outflow, which increases/decreases the capital ac-
    count. The flow of capital puts pressure on the exchange rate, generating a tendency
    for the domestic currency to appreciate/depreciate. In a fixed exchange rate regime,
    the domestic central bank must buy/sell foreign assets and increase/decrease the
    domestic money supply. This leads to an increase/a decrease in the domestic in-
    terest rate, which reduces/increases the capital account by increasing/lowering the
    incentives to invest in the domestic economy.

    Question 4
    Use the IS-LM model in closed and open economy to compare how the effects of
    a monetary policy contraction differ depending on whether the economy is closed,
    open with a flexible exchange rate, or open with a fixed exchange rate. For each case
    considered, give your answer mathematically, graphically, and with the underlying
    economic intuition.

    You might also like