Assignment:
1. Write out the Net Export identity, NX. Include the determinants of the three functions.
a. Explain the impact of a decrease of domestic income and then a decrease in foreign income on net exports? Show graphically in NX-Y space
b. Why is the Marshall-Lerner Condition important for net exports and the macroeconomy?
c. Define and derive the Marshall-Lerner Condition.
d. What are the two impacts of a change in the real exchange? How do they determine the effect on NX?
e. Explain what happens in the short-run to medium-run after a real exchange rate depreciation.
2. Suppose there is a increase in foreign income due to an expansion. What is the impact on the domestic economy? What is the effect on domestic output and net exports? Be sure to include the IS-LM-UIP-NX diagrams in your answer. Assume that the Central Bank is targeting the interest rate and hold E = ε fixed. Be sure carefully label the axes, relations, and equilibrium points.
3. True, False, Uncertain, Explain. Foreign investors expect the US dollar to appreciate against the Australian dollar over the coming year. This implies one year interest rates in the US will be higher than in Australia. Use the uncovered interest parity condition equation and graph in your answer. Be sure carefully label the axes, relations, and equilibrium points.
4. What happens when there is an expansionary monetary policy under flexible exchange rates to the exchange rate, interest rate, consumption, investment, and net exports? Be sure to include the IS-LM-UIP diagrams in your answer. (Hint: State your assumption about the monetary policy target?)