PPF and CPF for 15 points Tarzan and Jane each have 12 hours of work. They produ

Question

PPF and CPF for 15 points Tarzan and Jane each have 12 hours of work. They produce food and luxury goods. It takes Tarzan 1 hour to produce 1 unit of food and 2 hours to produce 1 unit of luxury goods. It takes Jane 3 hours to produce 1 unit of food and 2 hours to produce 1 unit of luxury goods. 1. Scenario 1: Suppose that Tarzan and Jane trade with each other (i.e., no outside merchants) Tarzan and Jane agree to trade goods under the following conditions: 1) the terms of trade are 4 units of food in exchange for 3 units of luxury goods; and 2) each specializes according to his/her comparative advantage. Sketch on two different graphs (one for Tarzan and one for Jane) the individual PPFs, the individual CPFs, the individual points of production, and shade the areas corresponding to the gains from trade. Clearly label your graphs (i.e., indicate values for slopes, intercepts, and points of production). Note that luxury goods are on the y-axis and food is on the x-axis. (6 points) a. Q^"" Tarzan TARZAN Jane ANE cTarzan Jane Tarzan Jane Tarzan Jane

Explanation / Answer

Having examined the different transmission channels indicating how the monetary

policy works in order to attain the ex-ante targets, in this paper our aim is to follow an

approach examining the main characteristics and effectiveness of conduct of policy

interventions of monetary authority giving special emphasis to the effects of capital flows and

then the following course of real exchange rate and the monetary policy aggregate by way of

employing a transmission mechanism ended with changes in the real interest rate and stock

exchange as well as domestic inflation and real income growth.

Monetary transmission mechanism (MTM) is an illuminating policy tool in

appreciating the monetary policy implementations by policy makers upon various nominal and

real factors of interest in the eyes of economic agents.

Especially in an open economy highly exposed to the effects of capital flows on

domestic business cycles with a liberalized capital account, control over policy aggregates

may be difficult since many other economic policy implementations would be of great

consequence on some other policy targets on macroeconomic income generation process and

in providing price stability and external balance. In this respect, in our paper we aim to

estimate the MTM for the Turkish and Poland economy. Our ex-post estimates for the period

1992-2010 using contemporaneous vector auto regression models such as impulse response

analysis indicate that weakly exogenous capital inflows appreciate the real effective exchange

rate, and in turn lower the real interest rates and domestic inflation while increasing both the

real output growth and also the stock exchange index considering an asset-price channel for

the latter and vice versa. We find some significant effects of the courses of capital flows and

real effective exchange rate on monetary policy variable in the transmission mechanism, and

such a case may impose an endogenous characteristic on the policy variable given also that

both domestic real interest structure is highly sensible to the monetary policy and that

monetary policy is subject to the structural breaks in the sense of so-called Lucas’ critique of

contemporaneous economics.

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