題目中的匯率\(\epsilon\)均為「direct quoate」，故若Home country為台灣，Foreign country為美國，則1台幣可兌換\(\epsilon\)美元。
Suppose the price levels are $120 per basket of consumption today and $140 tomorrow. Assume that the nominal interest rate is 5% today.
You will be able to buy 1 basket today.
You will be able to buy 0.8571429 basket tomorrow.
The real rate of return is -14.2857143%.You will be able to buy 1 basket today.
You will be able to buy 0.9 basket tomorrow.
The real rate of return is -10%.In general, money supply includes all sorts of the medium of exchange that facilitates transaction in a given period of time, which includes at least not the last cash (C) and saving deposits (D). Assume that money supply is C+D.
AA receives $200 payment in cash, out of which he keep $50 in his pockets and save the rest in a bank. This bank then loans out $100 to BB. Out of $100, BB spends $55 to buy something from CC. CC keeps $30 in his bank account and $25 cash in his pocket.
AA's C+D is 200;
BB's C+D is 45;
CC's C+D is 55;
Total C+D is 300.Wealth should deduct debt from a person's balance sheet. Whenever more money created via financital system, there will be quivalent debt created. As a result, it does not create more wealth in the economy.Suppose home currency is NTD and foreign currency is USD. Consider the following notation:
Home price level \(P\) NTD.
Foreign price level \(P^f\) USD.
Home interest rate \(i\) for NTD saving.
Foreign interest rate \(i^*\) for USD saving.
Today: 1 NTD=\(\epsilon\) USD.
Tomorrow: 1 NTD=\(\epsilon^e\) USD where superscript \(^e\) means expectation.
\(P\epsilon/P^f=1\)
\(i+(\epsilon^e-\epsilon)/\epsilon=i^*\), or
\(i+\Delta \epsilon^e/\epsilon=i^*\) where \(\Delta \epsilon^e/\epsilon=(\epsilon^e-\epsilon)/\epsilon\), or
\((1+i)=\epsilon(1+i^*)/\epsilon^e\)
Decrease in home interest rates makes home asset less attractive. There will be capital outflow which
- increase foreign currency demand (decrease home currency demand) in the foreign exhchange market.
Therefore,
- home currency nominal exchange rate drops--home currency depreciates until interest rate parity regains its balance.- Home currency depreciation will decrease home country's real exhange rate.
It makes home goods relative cheaper than foreign goods.
- home import decreases and home export increases.
- When the real exchange rate is lower than its supposed normal level from purchasing power parity. Such import and home export change will continue. In the foreign exchange market, import decrease reduces foreign currency demand, while export increase enhances home currency demand; home currency continue to appreciate until real exchange rate regains its balance, which restores original export/import volumes as before the exchange rate intervention.Given proper assumption on production function, we learn that \[\Delta y/y=\Delta A/A+\alpha \Delta k/k,\] where \(y\) is real output per capita, \(k\) is capital stock per capita, \(A\) is technology level, and \(0<\alpha<1\). Assume no technological progress, i.e. \(\Delta A/A=0\).
Assume that national (net) saving is a fixed proportion (\(s\)) of \(Y-\delta K\) where \(Y\) is total real output, \(K\) is total capital stock and \(\delta\) is capital depreciation rate. Let \(L\) denote total labor input as well as total population.
Nationa (net) saving=\(s(Y-\delta K)\).
Net investment (which is \(\Delta K\))=National (net) saving implies that \[\Delta K=s(Y-\delta K).\] Therefore \[\begin{eqnarray} \Delta K/K & = s(Y/K-\delta),\\ \Delta k/k \equiv \Delta K/K-\Delta L/L &= s(Y/K -\delta)-\Delta L/L\\ &= s(\frac{Y/L}{K/L}-\delta)-\Delta L/L\\ &= s(y/k-\delta)-n, \end{eqnarray}\]where \(n=\Delta L/L\).
Argue that contries with the same structure but different per capita income levels will converge to the same per capita income level in the long run.
Use this model to give two reasons to why poor countries can grow slower than rich countries.
A liquidity trap is a situation, described in Keynesian economics, in which, “after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers [holding] cash [rather than] holding a debt which yields so low a rate of interest.”
QE is special because of its mass purchase of non-traditional instrument assets, such as the long-term bonds, other than short-term government bonds.
Do you think that it will avoid the liquidity trap in the sense that people use the extra money for final output demand? Why?
How does QE affect bond yields? Explain.
QE will increase bond price, which decreases bond yields. As it applies to a wide range of maturity, the yield curve becomes flattered.