Answer all questions from this section. For each question, identify the statement as True,False, or Uncertain, and explain your reasoning (in a total of not more than 120 words). The maximum marks for each question will be given for a full and correct explanation. You may use written, diagrammatic, and mathematical arguments as appropriate.
A.1 Following the announcement that the amount of QE intervention by the central bank will be reduced going forward (also known as Quantitative Tightening), according to the UIP condition, an immediate appreciation of home’s nominal exchange rate would be observed. [4’]
A.2 The difffference between the slopes of the IS and RX curves depends only on the sensitivity of net exports to the real exchange rate. [4’]
A.3 Consider a temporary positive inflflation shock in a flflexible exchange rate regime (with an inflflation targeting central bank) and in a fifixed exchange rate regime (where there is no policy intervention). Assume that both economies converge to a medium run equilibrium.
Following the shock, inflflation converges to its equilibrium value from above in both cases.[4’]
A.4 The central bank of a common currency area should not respond to a shock specifific to one member. [4’]
Answer all sub-parts of part B in a total of not more than 1800 words (not including equations and fifigures). We do not expect you to use the full 1800 words. Answers must be typed. Figures and equations can be hand-written and pasted into the document. You will receive no points for fifigures or equations pasted from a textbook, lectures slides or any other external source.
You may paste simulator output into your answer document. If you wish to refer to data, do not copy and paste from an external source. Use a standard referencing system if you wish to refer to other sources. It is not necessary to reference lecture notes or the textbook unless you make a direct quotation.
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