Macroeconomics Assignment | Answers to Questions

Running head: MACROECONOMICS
MACROECONOMICS
Name of Student:
Name of University:
Author Note:

MACROECONOMICS1
Table of Contents
Answer to Question: 1.....................................................................................................................2
Answer to Question: 2.....................................................................................................................2
Answer to Question: 3.....................................................................................................................3
Answer to Question: 4.....................................................................................................................4
Reference List..................................................................................................................................5

MACROECONOMICS2
Answer to Question: 1
Higher capital mobility allows the developing countries to attract foreign direct
investment into the home country at a high rate. This creates greater amount of investment
opportunities in foreign countries. When capital goods are mobile, the difference in real
exchange rate will go down. Even though developed economy will be flooded by capital inflow,
it will not strengthen the currency value of developed country this inflow creates greater job
opportunities and increases the aggregate level of income (Ghosh, Ostry and Chamon 2016).
Uncovered Interest Rate Parity (UIP) defines that the difference between the interest rates
of two countries will be similar to the relative change in currency foreign exchange rates over the
same period because rise in FDI raises the demand of receiving country’s currency which
increases its exchange rate. This values improves the terms of trade with respect to price of
export to import. Capital mobility drives out the differences between exchange rates without
causing much currency devaluations.
Answer to Question: 2
Monetary policy is the policy used to manage the money supply and interest rate to attain
stable macroeconomic objectives like consumption, inflation, liquidity and growth. Dollar peg is
the value of currency at fixed exchange rate with respect to the US dollar. A fixed amount of
currency is given in exchange of US dollar. Central bank buy the US treasuries to generate
interest from dollar holdings. This happens only when a country has huge amounts of exports in
United States and receives dollar payments (Kearns and Patel 2016).
Central bank estimates the currency exchange rate and maintain the currency value by
lowering dollar’s value and raising the currency value when the value of currency falls below