discuss how the domestic Central Bank would respond to the capital flows, and the effects of this response on Alpha’s money supply, output and interest rate. Also show the effects on your graph.

ECON 401 International Finance

Instructions: Please read before beginning the assignment:

1) Answer all three questions. Your responses must be written on standard 8.5 by 11 inch notebook paper and turned in as a STAPLED document.

2) To be eligible for full credit, your responses must be in complete sentences and provide a clear and complete discussion of the relevant topics. Avoid the use of abbreviations and symbols in your responses.

3) Draw clear graphs and label everything (axes, curves, Y and R values, and the direction of shifts in curves). Graphs that are not drawn neatly or that are incomplete will lose points.

1. The economy of Alpha is on the gold standard. Use the open-economy macroeconomic model capturing the gold standard exchange rate regime to examine how the growing use of credit cards in Alpha would affect money demand and hence its domestic interest rate and capital flows.

Next, discuss how the domestic Central Bank would respond to the capital flows, and the effects of this response on Alpha’s money supply, output and interest rate. Also show the effects on your graph.

2. The economy of Omega is on the gold standard. Suppose that foreigners develop an increased preference for grapes and other fruit manufactured by Omega. Use the open-economy macroeconomic model capturing the gold standard exchange rate regime to examine how the this increased foreign preference for Omega’s fruit would affect Omega’s domestic interest rate and capital flows.

Next, discuss how the domestic Central Bank would respond to the capital flows, and the effects of this response on Omega’s money supply, output and interest rate. Also be sure to show the effects on your graph.

3. Suppose that as a result of a global financial crisis, the world interest rate falls. Assuming that the economy of Beta is on the gold standard, use the open-economy macroeconomic model capturing the gold standard exchange rate regime to examine how the fall in the world interest rate would affect Beta’s domestic interest rate and capital flows.

Next, discuss how the domestic Central Bank would respond to the capital flows, and the effects of this response on Beta’s money supply, output and interest rate. Also be sure to show the effects on your graph.

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