ECON1085: International Monetary Economics - Final Assessment Problems

This assignment solution for ECON1085, International Monetary Economics, addresses several key concepts. Question 1 analyzes Singapore's Balance of Payments, examining various transactions and their impact on the current and capital accounts, alongside an economic assessment of the presented data including exports, imports, income balances, and reserve assets. Question 2 uses the Metzler diagram to evaluate the Smartville economy, considering a closed economy with a real interest rate and the effects of opening up to trade, focusing on savings, investment, and comparative advantage. Question 3 explores exchange rate determination through interest rate parity, both covered and uncovered, and the role of central bank interest rate changes and expectations. Finally, Question 4 applies the Dornbusch sticky price model to assess the long-run exchange rate determination in response to the COVID-19 pandemic and quantitative easing measures by the domestic central bank, considering the impact of changes in money supply.

QUESTION 1
a. State how the following transactions would be recorded in Singapore’s’ Balance of
payments. In your answer state the item, the relevant account, and whether it is a credit
or a debit entry.
Exchanges identifying with the inflow of foreign exchange will be recorded on the credit side
and outpourings of foreign exchange on the debit side in parity of instalment. The sorts of
passage that would record in parity of instalment record of Singapore as follows:
i) A Singaporean resident purchases a dairy farm in New Zealand
Debit Entry
Capital Account
This is a kind of debit section that would record in a critical position the instalment record of
Singapore as money from Singapore will be paid to New Zealand.
ii) A UK resident visits their relatives in Singapore and spends SGD 600 shopping on Orchard
road.
Credit Entry
Current Account
This is a sort of credit passage that would record in a critical position of the instalment record of
Singapore as the spending of a US resident in Singapore is paid for Singapore.
iii) An Australian resident purchases a factory in Malaysia from a Singaporean resident
Credit Entry
Capital Account
This is a sort of credit passage that would record in a critical position of instalment record of
Singapore as the money will be gotten by residents of Singapore.

iv) A Singaporean company pays dividends to its Australian shareholders
Debit Entry
Capital Account
This is a kind of debit section that would be decided on the instalment record of Singapore as
money from Singapore will be paid to Australian investors in a type of profit.
v) An Australian resident receives income for services rendered in Singapore
Debit Entry
Current Account
This is a kind of debit section that would be decided on the instalment record of Singapore as
money from Singapore will be paid to Australian residents to render benefits in Singapore.
(b) Review the table below:-
unit Data S$m Previous
period
Balance of Payments S$m 3,530.80 4,141.10
Current Account Balance S$m 19,600.60 24,194.50
Exports of Goods and
Services S$m 224,918.40 220,269.20
Imports of Goods and
Services S$m 191,669.00 183,147.20
Primary Income Balance S$m -11,611.60 -10,716.50
Secondary Income Balance S$m -2,037.20 -2,211.00
Reserve Assets S$m 3,530.80 4,141.10
Official Foreign Reserves US$m 282,995.20 278,625.10
Net International
Investment Position S$m 1,207,120.5

Provide an economic assessment of the data presented. In your answer refer to the economic
significance of the various accounts in the balance of payments, the role of the central bank,
international net debt, changes in foreign investment and changes in trade flows, savings and
investment differentials .
The balance of payments (BoP) is the international balance sheet of a country that records every
single international exchange in merchandise, administrations, and assets longer than a year.
According to the table, there is a lessening in BOP the principle reasons are delineated beneath:
Current Account Balance
There is a reduction in current account balance whenever analyzed from the earlier year.
Running a deficiency on the current account implies that different nations are not paying their
way in the worldwide economy. There is a net outflow of interest and income from the circular
flow of income and spending. The current account doesn't need to balance because the balance of
payments additionally incorporates the capital account.
Exports of Goods and Services
This is the best part for any organization to have a positive fare. This shows the nation is
progressing admirably. Creating great items and there is an interest in the nation.
Imports of Goods and Services
An expansion in imports influences the BOP as it can prompt a negative BOP. Even though
imports are useful for a nation however it influences negatively on the BOP.
Primary Income Balance

The contrast between primary income receivable by Singapore residents from abroad and
primary income payable to non-residents from Singapore. The measurements show that there are
more individuals to move cash from Singapore. Even though they are helping the nation develop
by living and working, this is influencing the BOP.
Secondary Income Balance
The contrast between current transfers got by Singapore residents from abroad and current
transfers got by non-residents from Singapore. This is diminished and that is a positive sign as it
is a debit for a BOP.
Reserve Assets
Show the adjustments in Singapore's foreign reserves property. There is an abatement in
Singapore's official property of monetary gold and foreign exchange assets, just as Singapore's
uncommon drawing rights and reserve position in the International Monetary Fund. This is a
terrible sign for the BOP.
Official Foreign Reserves
The official reserve account, a subdivision of the capital account, is the foreign cash and
protections held by the administration, ordinarily by its national bank, and is utilized to balance
the payments from year to year. Nations utilize their foreign exchange reserves to keep the
estimation of their monetary standards at a fixed rate. There is an expansion in the reserves and
at this basic hour it will help to look after liquidity.
Net International Investment Position

The NIIP position is a significant gauge of a country's budgetary condition and creditworthiness.
In this BOP measurements, we see a positive NIIP figure that shows that the household country's
responsibility for assets is more prominent than foreign country's responsibility for local
country's assets, in this manner making it a creditor country.
QUESTION 2
In the context of National Income Accounting and the Intertemporal model: Consider a
country “smartville” with a closed economy real rate of interest of 3% while the prevailing
world interest rate is 1.5%.
Use the metzler diagram as a framework to critically evaluate the likely outcomes for the
“smartville” economy. In your answer refer to the current account balance, savings and
investment, comparative advantage, and discuss how “smartville” might gain from opening up
to trade with the rest of the world in this context.
On the off chance that the world interest rate is lower than the 'Smartville' interest rate, at that
point the nation would have a current account deficit.

Metzler diagram
Impacts on different segments
Holding the reaction of private savings steady, an expansion in the spending deficiency will
move national savings. Models:
● Government builds spending without expanding taxes. Purchasers don't change
utilization.
● Government cuts taxes without cutting G. Shoppers burn through the entirety of their tax
break on utilization.

On the off chance that the administration runs a deficiency today, they should bring taxes up
later on. High future taxes will diminish the current estimation of lifetime discretionary cash
flow. Shoppers should expand savings today.
In the event that 'Smartville' opens the market, they will have the option to Invest in developing
business sector nations which can here and there be an unthinkable undertaking if the nation
you're putting resources into has a few barriers to passage. At the point when a nation becomes
changed, securities exchange esteems additionally rise. Store chiefs and financial specialists are
consistently watching out for new open doors for benefit. Opening the economy diminishes the
political hazard to financial specialists. For the administration to keep on pulling in progressively
foreign investment
Monetary liberalization will be helpful for the nation. The basic objective is to have unlimited
capital flowing into and out of the nation to support development and efficiencies inside the
nation of origin. The impacts following liberalization are what should interest speculators as they
can give new chances to expansion and benefit.
QUESTION 3
Consider models of Exchange rate determination. Assume interest parity holds and the return
on a domestic asset is equal to the covered return on a foreign asset. In the domestic economy
the central bank decreases the interest rate in order to stimulate the economy.
Using both covered and uncovered interest parity conditions identify the direction variables
would be expected to move in response to the policy changes in order to restore parity. What
role do expectations play if any in this process?

Interest Rate Parity is a hypothesis where the distinction between the interest rates of two nations
stays equivalent to the distinction determined by utilizing the forward exchange rate and the spot
exchange rate strategies. Arbitrage is the action of buying a resource in one money related
market and selling it at a benefit in another.
As per secured interest rate hypothesis, the distinction between interest rates in two nations is
invalidated by the spot or forward cash premiums or limits so the speculators couldn't win an
arbitrage benefit from purchasing and selling the money related resource.
Revealed Interest Rate hypothesis expresses that the normal thankfulness or deterioration of
specific money is invalidated by a lower or higher interest rate. This implies if individuals
anticipate that cash should be acknowledged, at that point the estimation of the advantage in that
money would be higher which makes it a productive investment.
On the off chance that the Interest Rate Parity hypothesis holds, at that point, it can invalidate the
chance of arbitrage. It implies that regardless of whether financial specialists put resources into
domestic or foreign money, the rate of investment will be the equivalent in both. This can be
better comprehended with the assistance of a model.
Let us consider investing € 1000 for 1 year. Here, we'll have two choices to
invest −
The case I: Domestic Investment
In the US, accept that the spot exchange rate is $1.2245/€1.
Along these lines, we get an exchange for our €1000 at the rate of $1.2245 which gives $1224.50
We can contribute this measure of $1224.50 at the rate of 3% for 1 year which yields $1261.79
toward the year's end. In this manner, the last return from this investment would be $1261.79.

Case II: Foreign Investment
We can likewise put €1000 in a foreign market, where the rate of interest is 5.0% for 1 year.
Along these lines, €1000 at the rate of 5% for 1 year will give €1051.27
Let the forward exchange rate be $1.20025/€1.
In this way, we purchase forward 1 year later exchange rate at $1.20025/€1 since we have to
change over our €1000 back to the domestic money, i.e., the U.S. Dollar.
At that point, we can change over € 1051.27 @ $1.20025 in future for example following one
year which gives $1261.79. Hence, the last return from this investment will likewise be
$1261.79.
Hence, when there is no arbitrage, the Return on Investment is equivalent in the two cases,
paying little mind to the decision of investment strategy (home or foreign).
Presently, if the national bank of the domestic nation diminishes the interest rate to animate the
economy, the domestic interest rate will become lower than foreign interest rates. On the off
chance that foreign money doesn't have a forward rebate or when the forward markdown isn't
sufficiently enormous to counterbalance the interest rate advantage, an arbitrage opportunity is
accessible for the domestic financial specialists.
Along these lines, domestic speculators can here and there advantage from foreign investment.
This will energize greater investment in foreign money by the domestic residents in desire for
more significant yields. To forestall foreign cash arbitrage for example benefit, the foreign
money must exchange at a forward markdown with the goal that interest parity despite
everything holds. This implies there ought to be devaluation in that money when contrasted with
domestic cash.

Desires assume a significant job in this procedure. Individuals begin investing increasingly more
in foreign assets because of the decline in the domestic interest rate. This will build the interest
for foreign assets or money which in the end prompts foreign cash appreciation. This will make
the foreign money to exchange at a forward rebate which helps in reestablishing interest rate
parity.
QUESTION 4
Consider theories relating to exchange rate determination in the Long Run. The domestic
central bank responds to the COVID 19 virus by increasing money supply via quantitative
easing measures.
A. Applying the Dornbusch’s sticky price model and assuming the exchange rate is not
managed directly by the central bank, explain the implications of the central bank
actions on the spot exchange rate (e)
In an unreservedly floating exchange rate framework without intercession from governments,
showcase powers would decide the exchange rate esteems. Yet, on the off chance that money
takes on an outrageous worth, either excessively high or excessively low, the administration and
the national bank can't disregard the exchange rate if they wish to accomplish medium-term
targets of development and low expansion.
● In the short run:The Dornbusch's clingy value model contends that the foreign exchange
rate will briefly blow up to changes in monetary arrangement to make up at clingy costs
of products in the economy. In the short run, the harmony level will be reached through
an expansion in the spot exchange rate.

● Over the long run: Over the long haul the cost of the spot exchange rate, unsticks, and
acclimates to the truth of these budgetary market costs.
Applying the monetary model, clarifying the ramifications of the national bank activity on the
spot exchange rate and the ramifications of the national bank activity on the spot exchange rate,
national bank intercession can build the volatility of spot exchange rates. In the short run yet
over the long haul the PPP will hold.
What are the key contrasts in the monetary and Dornbusch models of exchange rate
assurance?
The monetary model suggests the costs of merchandise are adaptable, and that purchasing power
parity consistently holds. The Dornbusch's clingy value model contends that that costs of
products are clingy in the short run, and that PPP holds just over the long haul however doesn't
hold in the short run since merchandise costs alter gradually comparative with resource costs.
QUESTION 5
Consider the relationship between the exchange rate and the balance of payments. Examine
the case of a small country in the import and export markets under the elasticity approach.
(a)Draw a separate graph for the import market and the export market illustrating the effect of
a rise in e, on the foreign price of imports and exports and the quantities of imports and
exports respectively.
The different meanings of the genuine exchange rate can be mostly assembled into two
fundamental classes. The main classification of definitions is made following the purchasing
power parity (PPP), while the second depends on the differentiation between the tradable and the
nontradable products

(b)What can be determined about the effect on the trade balance from a rise in e as a result of
your analysis in part (a).
At the point when the cash of a nation builds its e, its exports will become costlier causing a
decrease in them, though its imports will become less expensive bringing about increment in
them. Subsequently, net exports of the nation will decay prompting the decline in net exports and
will accordingly cause a leftward move in the total interest bend AD.
(c)If there is less than 100% pass through how might this impact on import expenditure?
Officially, exchange-rate go through is the flexibility of neighbourhood cash import costs
concerning the nearby money cost of foreign cash, regularly estimated as the rate change, in the
neighbourhood cash, of import costs coming about because of a one percent change in the
exchange rate between the sending out and bringing in countries. An adjustment in import costs
influences retail and customer costs. At the point when exchange-rate go through is more
noteworthy, there is more transmission of swelling between countries. Exchange-rate go through
is additionally identified with the law of one cost and purchasing power parity

(d)Assume a small economy is below full employment. Illustrate and explain how a reduction
in the value of the domestic currency (rise in e) will impact on the trade balance under the
absorption approach.
The prompt impacts of debasement are increment in exports and decrease in imports with the
goal that the balance of payments deficiency can either be diminished or killed. The
accomplishment of the balance of payments harmony through devaluation.
(X – M) is the net export or balance of payments work. It fluctuates conversely with income. (I –
S) is the net investment work which changes straightforwardly with the degree of income. At
first, given (X – M) and (I – S) work, the harmony happens at the income Y0. In this harmony
position, there is a balance of payments shortage adding up to AY0.
The devaluation of home money amplifies exports and decreases imports so that (X – M) shifts
up to (X – M)'. Its crossing point with (I – S) happens precisely at the flat scale at the income Y1.
Since no hole is left between (X – M) and the even scale, the BOP shortage has been cleared out.
(e)Consider how you might model the impact of the COVID19 virus on a small economy
initially at full employment. Discuss likely outcomes using the absorption model.

Covid can lead to devaluation and also barricade the Exim. Hence, it will show a huge economic
downturn. Though the economy will be at full employment level there will be a recession and
that will hurt the economy. The outbreak and of the regulation measures inside small countries.
For instance, the car industry's middle of the road exports may fall generally more as the
business is geologically limited in the district where the flare-up of COVID-19 happened. Once
sectoral information is accessible the probable impact on the different worldwide worth chains
will become more clear.
QUESTION 6
In the framework of the Swan model, assume that Singapore was achieving both internal and
external balance, prior to the outbreak of COVID 19. Assume that Singapore faces a
relatively inelastic IB schedule and a relatively elastic EB schedule.
A. Illustrate a likely outcome of the COVID19 virus on both internal and external balance
and mark Singapore’s current post virus position on a Swan Diagram as X.
Singapore is currently accomplishing outside balance, however, encountering inflation

B. Briefly explain how and why an attempt to restore internal balance will disrupt
external balance
Singapore faces a generally inelastic Internal Balance Schedule and moderately inelastic outside
balance. The Internal Balance bend inclines down from left to right. It shows that Lower the cost
proportion which cutoff points exports and imports subbing production, the higher must be the
genuine use to keep up the full business. The privilege or more bends speaks to inflation and
domestic genuine uses exorbitantly high comparative with exports and import substitute creation.
To one side we speak to work. There are two influences which will disturb the outside balance
and will reestablish the inner balance
International
Prices /
Domestic
Prices
Real ExpenditureO X
y
Inflation
External Bal
(X-M)
Surplus
Unemployment
Deficit Internal Bal
(Full
Employment)
I
IV
II
III

C. What automatic mechanisms may help restore internal balance? How effective might
these mechanisms be in the current economic situation brought on by the Covid19
virus?
In the structure of the Swan model, in the current financial circumstance welcomed on by the
Covid19 infection. the programmed instruments that may help reestablish inside balance would
be a decline in domestic utilization and lower value level.
D. Following the recommended policy assignment rules, what policies should be put in
place to restore general macroeconomic equilibrium.
FISCAL
The specialists have declared 3 bundles of measures on February 18, March 26, and April 6,
adding up to complete improvement of S$59.9 billion (12.2 percent of GDP). Assets to contain
the episode are about S$800 million (primarily to the Ministry of Health).
MONETARY AND MACRO-FINANCIAL
The MAS and the budgetary business reported an itemized bundle of measures to support people
and SMEs confronting impermanent income troubles identified with the COVID-19 pandemic.
The bundle has three parts: (I) assist people with meeting their advance and protection
responsibilities; (ii) support SMEs with proceeds with access to bank credit and protection
spread; and (iii) guarantee interbank subsidizing markets stay fluid and well-working.
QUESTION 7
With reference to the IS-LM-BP analysis of a small economy like Ireland, answer the
following questions and provide the required explanation and diagrams.

a. Assuming Ireland trades predominantly within the eurozone, has perfect capital
mobility and a fixed exchange rate (Euro), examine the effect that an expansionary
monetary policy put in place by the European central bank has for the domestic (Irish)
economy.
In the economy where capital is marvellously adaptable, the exchange rate is fixed the congruity
level in IS-LM-BP model is developed where the items feature, cash market, and balance of
portion is in balance that can be showed up as:
Along these lines, e is the balance point where agreement interest rate (i*) and balance yield
(Y*) is gained. In case a national bank picks an expansionary monetary plan, by then it will shift
the LM curve to the other side and there will be a reduction in the interest rate. It might be
showing up as:

Along these lines, it will lessen the interest rate and prompts continuously capital inflow in the
country anyway the exchange rate is fixed. Along these lines, the national bank will decrease the
money supply to keep up the exchange rate fix. In this manner, the LM curve will shift back to
its fundamental position. Subsequently, the monetary course of action isn't useful.
b. To counteract the negative effects of the COVID 19 virus on the domestic economy of a
small open economy with a flexible exchange rate (such as New Zealand), would you
recommend a fiscal or monetary policy response? Use the IS LM BP model to support
your answer
Because of the effects of COVID 19 contamination, the usage utilization in the economy will fall
which prompts a leftward shift in the IS curve from IS to IS'. It prompts BOP insufficiency. BOP
shortfall will cheapen the domestic money considering the way that the exchange rates are
versatile. It will incite an extension in the net exports and a rightward shift in the IS curve to its
hidden position. From now on, no intercession is required for this circumstance.

QUESTION 8
With reference to the IS-LM-BP analysis, answer the following questions and provide the
required explanation and diagrams to support your analysis.
Assume a country like the United Kingdom (UK) with high levels of capital mobility and a
flexible exchange rate, puts in place an extensive expansionary monetary policy. Examine the
likely effect that this policy has for the UK economy.
Expansionary Monetary strategy - > bringing down of interest rates - > Huge capital outflow - >
devaluation of cash - > Increase in exports

Expansionary monetary strategy implies increment in money supply by the national bank, this
would shift the LM curve to one side from LM1 to LM2. We have brought down the interest
rates from i1 to i2 and increment in GDP from Y1 to Y2. The underlying balance was E1 and the
new harmony is E2, E2 balance is beneath the BP line, which proposes that the economy would
have a negative Balance of payments impact.
As we have a drop in interest rates, the speculators would no longer have any motivating forces
to keep their money in the UK, so they would take their money out from the UK and would put
resources into such nations which have a higher rate of interest. This would bring about colossal
capital outflow, consequently prompting negative capital account impact. As the financial
specialists are taking their money out from the UK, it brings about a decrease popular for UK
Pound sterling. As request decreases, the estimation of Pound sterling decays, in this way
prompting deterioration of the UK money.

Here we have the diagram, Decline sought after of Pound sterling, prompting a shift of Demand
curve to one side from D1 to D2, therefore we have a decrease in the exchange rate. i.e
deterioration of exchange rate.
The devaluation of the exchange rate brings about increment in exports, as deteriorating home
money makes imports costlier and exports less expensive. It would bring about increment in
exports for the UK, in this manner prompting Current account overflow. In any case, the shortfall
in capital account is route higher than the surplus in the current account, so the general BOP
account is in deficiency (E2 harmony in the main diagram underneath the BP curve)
How might an expansionary fiscal policy in the UK spill over to a smaller trading partner (for
example the republic of Ireland)? Illustrate and explain the macroeconomic interdependencies
between the UK and Ireland. What other factors might impact the transmission of impacts
between the two nations?

Expansionary Fiscal approach - > increment of interest rates - > Huge capital inflow - > energy
about money - > Decline of exports and increment in imports - > expanded imports from Ireland
- > expanded creation in Ireland - > expanded business and GDP of Ireland.
Expansionary fiscal arrangement implies increment in government use and tax reductions, this
would shift the IS curve to one side from IS1 to IS2. We have an increment in the interest rates
from i1 to i2 and increment in GDP from Y1 to Y2. The underlying balance was E1 and the new
harmony is E2, E2 balance is over the BP line, which recommends that the economy would have
a positive Balance of payments impact.
As we have an increment in interest rates, the financial specialists would need to take advantage
of a higher rate of interest, so they would take their money out from different nations and would
store/put resources into the UK. This would bring about tremendous capital inflow, along these
lines prompting positive capital account impact. As the speculators are investing in the UK, they
need Pound sterling to do as such, it brings about an increment sought after for UK Pound
sterling. As request builds, the estimation of Pound sterling increments, in this way prompting
energy about the UK money.

Here we have the chart, increment popular of the Pound sterling, prompting a shift of Demand
curve to one side from D1 to D2, in this way we have an increment in the exchange rate. i.e
energy about the exchange rate. The energy exchange rate brings about a reduction in exports, as
acknowledging home money makes imports less expensive and exports costlier. In this way, it
would bring about increment in imports for the UK and lessening in exports for the UK, along
these lines prompting Current account deficiency.
Be that as it may, the surplus in the capital account is path higher than the deficiency in the
current account, so the general BOP account is in surplus(E2 harmony in the primary chart over
the BP curve).
Presently has the UK is bringing in more and sending out less, it would prompt increment in
imports from exchanging accomplices like Ireland, along these lines it would bring about
increment underway in Ireland as there is expanded interest from the UK, increment creation
prompts expanded business and in this way prompting income creation, more people land

positions and they get incomes, consequently prompting expanding incomes in hands of
individuals in Ireland and as they spend their income on different merchandise and enterprises, it
prompts making of interest for different merchandise and ventures too, subsequently expanding
creation of different products and ventures and in this way further increment in work and
incomes. In such habits the expansionary fiscal strategy profited the UK just as profited Ireland,
that is called overflow impact.
QUESTION 9
Consider a country with a fixed exchange rate. Assume there is initially macroeconomic
equilibrium, there is no flow of assets/ capital internationally i.e. zero capital mobility. Then
the Government undertakes an expansionary fiscal policy. Using the IS-LM-BP framework
A. Illustrate the initial policy effect graphically.
Fixed exchange rate structure suggests the course of action of fixed exchange where the money
exchange rate is fixed at a given rate, and at whatever point there are instabilities from that
exchange rate, the national bank of the nation intervenes to bring it back.
Expansionary fiscal methodology implies a strategy of the assembly of the nation, through which
the organization impacts the absolute interest and worth level in the economy. Expansionary
fiscal methodology induces that there is an extension in government spending or a reduction in
taxes by the organization. Both of these results into an extension in the all-out interest in the
economy. Under the fixed exchange rate framework, an expansionary fiscal course of action if
the assembly will result in a basic augmentation in both the interest rate, similarly as the income
level.
This is showed up in the figure underneath:

As the governing body grasps expansionary fiscal game plan, the IS curve shifts to the other side.
The equilibrium moves from A to B.
The equilibrium is tricky as under the fixed exchange rate structure, the national bank must need
to intervene to achieve the fixed exchange rate.
B. Due to the policy what is the resulting disequilibrium.
Under a fixed exchange rate system, any distraction from the fixed exchange must be helped by
the national bank of the economy. The national bank mediates till the equilibrium is set at the
fixed exchange rate.
In the given case, as showed up in the above figure, the hidden equilibrium was at An, anyway
the expansionary fiscal strategy results into another equilibrium away from the fixed exchange
rate at point B. As needs are, the resulting disequilibrium is at a higher interest rate (I') at B.
What action does the central bank need to undertake to maintain the fixed exchange rate?
The expansionary fiscal strategy results in a development in interest rate. This higher interest rate
will result in a spending overflow. To keep up the fixed exchange rate, the national bank needs to
intercede to lessen the estimation of domestic money. The national bank will do this by selling

the domestic money and purchasing foreign money in the foreign exchange promotion. This will
manufacture the supply of domestic money, consequently shifting the LM curve to the other side.
This is showed up in the going with the figure:
The LM curve will shift to LM'. The new equilibrium will be at C, where the IS' merges LM',
and the country can keep up its fixed exchange rate, at interest rate I.
Along these lines, the expansionary fiscal strategy, and subsequently the intercession by the
national bank has come to fruition into an addition in the income level or GDP in the economy.
C. What is the net effect on Y as a result of the monetary expansion?
The expansionary monetary game plan by the national bank will realize an augmentation in
money supply in the economy. This has achieved an extension in the income level. From the
start, the income was at Y, by then it extended to Y1 due to expansionary fiscal strategy, finally
it showed up at Y'.
Along these lines, the net effect on Y is an extension in Y, from Y to Y' as shown in the above
figure.
QUESTION 10
“A small open economy that relies heavily on trade with other nations is better positioned to
adjust to external shocks if it has a floating/ flexible exchange rate mechanism” Discuss.

In your answer consider automatic adjustment mechanisms.
The purpose behind this is under a floating/adaptable exchange rate system the exchange rates
depend on the supply and request levels of the market. Therefore the floating exchange rate may
be "self altering" implying that it reacts to changes in the private market because of shifts
popular and supply. At the point when one depends intensely on exchange with their nations, a
floating exchange may affect execution and money related outcomes, as the exchange rate isn't
known and is balanced dependent available, where under a fixed exchange rate the exchange
among two monetary forms is set and known.
How might the current COVID 19 context impact on the adjustment process?
The current COVID 19 effect on the alteration procedure is bringing about enormous changes to
the exchange rates. The purpose behind this is there have been significant disturbances in supply
chain networks all around the globe, for pretty much every firm. This has swayed the supply
side, which is bringing about shortages. Simultaneously there have been shifts popular for certain
business sectors, which has come about likewise more popular. Therefore there have been huge
swings and volatility in the floating/adaptable exchange rates in the business sectors during the
previous 30-60 days. The effect this has on the change procedure is that it makes it hard to
anticipate what the exchange rate ought to be until the business sectors settle.
The general idea here is that when one takes part in a ton of exchange with foreign markets this
can result in shrivelling a fixed or adaptable rate, by and large, the floating rate can bring about
unforeseen changes to the exchange rate, which may have a positive or negative effect on a
business, depending on the off chance that they fall on the good or troublesome side of the
exchange rate.