1) Using Harvey’s four quadrant model, illustrate and describe the possible effects on nominal GDP,

May 19th, 2015
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1) Using Harvey’s four quadrant model, illustrate and describe the possible effects on nominal GDP, the exchange rate E, employment N and interest rates r of a tightening of monetary policy in a country. 2) There is overshooting in this model, but it has a different cause to the overshooting described in the Dornbusch Model. What is the main difference? 3) (Where you show the flexibility of this model) Use the model to illustrate the possible impact of an increase in nominal wages which is not matched by an increase in productivity, where that increase in nominal wages has a greater impact on aggregate supply than on aggregate demand. Assume the monetary policy curve shifts by enough so that there is a small increase in interest rates, but that expectations of exchange rates shift by enough so that there is a small currency depreciation. The impact of the increase in labour costs on the real exchange rate is such as to produce a small trade deficit. Show these events on your diagram.

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Answer for -1-------------------------------We have seen that existing studies have produced a number of different estimates of the exchange rate of the renminbi. The reason behind the difference is that different theories, data and econometric methods are used. It is clear that not all the theories that are actually used are suitable for forecasting the movement of exchange rate. Some may be better than others. Thus, it is very important for researchers who study exchange rates to choose or create a better model with micro foundations for an empirical study. In this Chapter, we investigate existing theories, their preconditions, implications and advantages and disadvantages, which will be helpful to the modeling efforts to be made in the next part.The exchange rate theories investigated in this part can be classified into three kinds: partial equilibrium models, general equilibrium models and disequilibrium or hybrid models. Partial equilibrium models include relative PPP and absolute PPP, which only consider the goods market; and covered interest rate parity (CIRP) and uncovered interest rate parity (UCIRP), which only consider the assets market, and the external equilibrium model, which states that the exchange rate is determined by the balance of payments. General exchange rate equilibrium models include the Mundell- Fleming model, which deals with the equilibrium of the goods market, money market and balance of payments, but lacks micro-foundations to some extent; t

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