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FA25 ECON 302 002 Homework #12 (International Finance)

Numerical

To answer the following question, use equations (20.7) and (20.8) in the textbook. The Federal Reserve is increasing the real interest rate from 𝑅 𝑡 = 𝑟 ¯ to 𝑅 𝑡 ′ = 𝑟 ¯ + 0.75 % . The rest of the world does not change the real interest rate 𝑅 ¯ 𝑤 = 𝑟 ¯ . If 𝑏 ¯ 𝑖 = 0.5 and 𝑏 ¯ 𝑛 𝑥 = 1.4  , calculate short-run output 𝑌 ~ using the IS curve assuming the economy is not subject to any demand shocks. Write your answer as a percentage and round it to the nearest tenth. 

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We start by restating the problem in our own words to ensure we know what is being asked. The task is to compute the short-run output deviation Y~ using the IS curve, given that the real interest rate in the U.S. rises from Rt = rbar to Rt' = rbar + 0.75%, while the rest of the world keeps Rbar_w = rbar. We are provided with b_i = 0.5 and b_nx = 1.4 and told to express the final result as a percentage, rounded to the nearest tenth. First, identify the source of the IS relation used in this context. In standard macroeconomic IS analysis with a simple open economy setup and small-sample short-run dynamics, the IS curve links output (Y) to the real interest rate (R) via an equation of the form Y~ = f(ΔR, parameters), where changes in the domestic real rate affect investment and, through trade, net exports as well. The problem references equations (20.7) and (20.8) in the......Login to view full explanation

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Similar Questions

Consider the IS curve 𝑌 ~ 𝑡 = 𝑎 ¯ − 𝑏 ¯ ( 𝑅 𝑡 − 𝑟 ¯ ) + 𝑥 ¯ 𝑌 ~ 𝑡 , where 𝑏 ¯ = 1 , 𝑥 ¯ = 1 / 4 , and 𝑅 𝑡 − 𝑟 ¯ = 0.03 . If there is a positive demand shock where the economy goes from 𝑎 ¯ = 0 to 𝑎 ¯ = 0.05 , then short-run output changes by ______ percentage points (enter a negative number for a fall in short-run output and a positive number for a rise in short-run output). Round your answer to the nearest tenth of a percent.

Using the IS curve 𝑌 ~ 𝑡 = 𝑎 ¯ − 𝑏 ¯ ( 𝑅 𝑡 − 𝑟 ¯ ) , in the long run,  𝑎 ¯ [ Select ] equals 0 equals 1 and 𝑅 𝑡 [ Select ] > < = 𝑟 ¯ , so that [ Select ] the economy's actual output equals potential output. the economy is in a boom the economy is in a recession .

Consider an economy with the following IS curve: 𝐼 𝑆 : 𝑌 ~ 𝑡 = 𝑎 ¯ − 𝑏 ¯ ( 𝑅 𝑡 − 𝑟 ¯ )   Suppose we assume 𝑎 ¯ = 0.03 , 𝑏 ¯ = 1 , 𝑅 𝑡 = 𝑟 ¯ = 0.045 . Let Δ 𝑌 ~ 𝑡 = 𝑌 ~ 𝑡 − 𝑌 ~ 𝑡 ′ , where 𝑌 ~ 𝑡 is short-run output when the real interest rate equals 𝑅 𝑡 and 𝑌 ~ 𝑡 ′ is short-run output when the real interest rate equals 𝑅 𝑡 ′ . If the real interest rate falls from 𝑅 𝑡 to 𝑅 𝑡 ′ = 0.02 , then Δ 𝑌 ~ 𝑡 = ______ percent. Round your answer to the nearest tenth of a percent.

Consider the IS curve 𝑌 ~ 𝑡 = 𝑎 ¯ − 𝑏 ¯ ( 𝑅 𝑡 − 𝑟 ¯ ) + 𝑥 ¯ 𝑌 ~ 𝑡 , where 𝑏 ¯ = 1 , 𝑥 ¯ = 1 / 4 , and 𝑅 𝑡 − 𝑟 ¯ = 0 . If there is no demand shock, i.e. 𝑎 ¯ = 0 , and the real interest rate increases by 1 percentage points, then short-run output changes by ______ percentage points (enter a negative number for a fall in short-run output and a positive number for a rise in short-run output). Round your answer to the nearest tenth of a percent.

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