Macro Economic Theory - Foreign Exchange Market - Economics Assignment Help

Assignment Task :

Learning Outcomes :

1. Apply macro-economic theory to analyse contemporary economic issues;
2. Understand the foreign exchange market

Questions:

1. In the exchange rate model with short-run price stickiness, the nominal interest rate rises immediately if there is a permanent fall in money supply. However, the model of monetary approach to the exchange rate suggests that the interest rate rises when there is a permanent increase in the growth rate of money supply. Explain how the different assumptions in these two models lead to contrasting predictions about how exchange and interest rates interact. Show the relevant long-run time paths of the interest rate, price level and nominal exchange rate in each model.

2. Explain the basic model of ‘monetary approach to the exchange rate’. How does the ‘general long- run model’ based on the real exchange rate differ from this basic model? 

3. Discuss the short run and the long run effect of a permanent exogenous increase in foreign money supply on the domestic money market and the foreign exchange market.

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