Practice Homework. 1) An economy with a floating exchange rate is facing an inflationary gap tied to an unsustainable increase in the stock market.

Practice Homework.

1)  An economy with a floating exchange rate is facing an inflationary gap tied to an unsustainable increase in the stock market.   

a) Graph this situation with and AD/AS model

b) Should the central bank use expansionary or contractionary monetary policy to help with this issue? 

c) Should the Fed buy or sell T-Bills to achieve their policy goal?

d) Draw the liquidity preference graph which shows what happens to interest rates (r)

 and qty of money with the actions taken in part b.

e) Draw the US currency market (US dollars on x axis/exchange rate in euros on y axis) showing how part d impacts this market.

f) Graph the AD/SRAS/LRAS curves for this action.  Be sure to label the inflationary gap that is being closed.

g) Specifically describe how this policy impacts the following (no need for explanations as to why but the direction of effect is required for each item): 

Leave a Reply