Economics assignment question

1)WSJ: ``ECB’s Mario Draghi Reasserts Readiness to Expand Stimulus”, November 13, 2015.

“European Central Bank President Mario Draghi reasserted the ECB’s readiness to expand its bond purchase program and perhaps enact other measures to combat weak inflation in the eurozone…. Many economists view this as a signal that the central bank is seriously considering expanding the volume and length of its large-scale asset purchase program, or quantitative easing, beyond the €60 billion ($64.54 billion) a month that the ECB started buying in March of this year and has said it would continue to buy until at least September of next year…”

Evaluate the impact of this announcement regarding a permanent increase in the Euro supply on the U.S. and the euro-dollar exchange rate. Consider the complete exchange rate determination model we learned in this course. When answering the below questions. Take U.S. to be the home country.

1. [3 points] Illustrate using graphical analysis how this change affects the U.S. money market. Label your initial equilibrium point A, label the short run equilibrium point B, and your long run equilibrium point C. You can show short run and long run on the same graphs. Label all axes and indicate curve shifts with arrows. Label all axes and indicate curve shifts with arrows.

1. U.S. FX Market.

- [1 point] What happens to the DR schedule in the short run?

- [2 points] Why? Explain.

- [1 point] What happens to the DR schedule in the long run?

- [2 points] Why? Explain.

- [1 point] What happens to the FR schedule in the short run?

- [2 points] Why? Explain.

- [1 point] What happens to the FR schedule in the long run?

- [2 points] Why? Explain.

iii. [3 points] Explain the behavior of E_dollar/euro in the short-run and in the long-run.

2) The Asset Approach and the Fixed Exchange Rate Regime

Malaysia pegs its exchange rate to the U.S. dollar (fixed ). The Central Bank of Malaysia is committed to protect its fixed exchange rate regime and capital mobility, under all circumstances.

For each of the separate cases below, analyze how the economic change in that case affects the Malaysian money and foreign exchange markets in the short-run.

Illustrate your answer using the graphs. Label your initial equilibrium point A and your short-run equilibrium point B. Label all axes and indicate curve shifts with arrows. Explain the reason for each curve shift briefly.

1. a) [6 points] Suppose Malaysia experiences an economic boom.
2. b) [6 points] Suppose the U.S. dollar is expected to depreciate.