Homework 3 Due Date: 11h December 2017 1 of 2 Assume that the investment depends
ID: 1122774 • Letter: H
Question
Homework 3 Due Date: 11h December 2017 1 of 2 Assume that the investment depends negatively on the real interest rate. That is (1)? Explain using ad e. Write down the system of equations (in the long run) where (REE.PH.Y)are the endogenous variables f. In the long run, what is the effect of a permanent increase in government expenditure on output and nominal exchange rate with and without assumption (1)? g. In the long run, what is the effect of a permanent increase in money supply on output and nominal exchange rate with and without assumption (1)?Explanation / Answer
Considering assumption (1), if Investment depends negetively on the real interest rates then, the following occurs:
F. In the long run, a permanent increase in government expenditure would lead to an increase in level of output as well as an increase in the nominal exchange rate.
An increase in government expenditure would lead to an increase in investment, the level of import would also rise the level of imports and a rise in demand for foreign exchange. Hence due to increase in investment, the level of output increases and increase in demand for foreign exchange leads to a rise in nominal exchange rates.
G. A permanent increase in Money supply would not increase the level of output rather it would just increase the nominal exchange rate by increasing the level of imports and foreign exchange demand.
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