Question

1.2. Activities Exercise No. 1 (60 points) Suppose an economy for which we know that there is a fixed exchange rate of 1500 diner/$. Explain and graph (IS/LM and money market) what effect it would have on the interest rate if the current exchange rate is 800 diner/$. Indicators / Levels of achievement Achieved Moderately achieved Not achieved Explanation Explain correctly Considering the relationship cause effect the model IS/LM and market monetary Taking into account the cause effect relationship (30 points) Explain correctly Considering the relationship the IS/LM model causes an effect Taking into account the cause effect relationship (15 points) Does not explain correctly and does not take into account the cause effect relationship (0 points) Chart Changes are identified produced in IS/LM and money market. (30 points) Change is identified produced in IS/LM. (15 points) No change is identified produced in IS/LM neither in market exchange rate. (0 points) Exercise No. 2 (40 points) Draw a graph and explain what effect the implementation of an expansionary fiscal policy had in an open economy with full capital mobility and a fixed exchange rate. Indicators / Levels of achievement Achieved Moderately achieved Not achieved Explanation Explain correctly Considering the relationship cause effect (10 points) Correctly explains that there are 2 errors in the cause-effect relationship. (5 points) Does not explain correctly and does not take into account the cause effect relationship (0 points) Chart Changes are identified produced in IS/LM incorporating all the model variables Considering the relationship cause effect (30 points) The change is identified produced IS or LM considers the cause-effect relationship (15 points) NO identify the changes produced in IS/LM incorporating all the model variables Considering the relationship cause effect (0 points)

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Impact on interest rate graphically represented with full capital mobility and implementation of expansionary policy.

[Step-by-Step]

Exercise No. 1:

1. Initial exchange rate:1500 \, \text{diner/}\$.

2. Current exchange rate:800 \, \text{diner/}\$.

Graph IS/LM and money market:

\text{Interest rate (r)} \to \text{Y-axis}

\text{Income (Y)} \to \text{X-axis}

Given the fixed exchange rate:

1. Due to deviation from the fixed exchange rate, the monetary authority must intervene by decreasing the money supply.

2. Money supply affects LM curve.

3. Graph IS/LM representing decreased money supply shifts LM leftward.

Answer: Graph showing changed interest rates with LM curve shift.

Exercise No. 2:

1. Expansionary fiscal policy stimulates aggregate demand shifting IS curve rightward.

2. In open economies with full capital mobility and fixed exchange rates:

- Increased income raises demand for money.

- Central bank intervenes to maintain exchange rate by increasing money supply.

3. LM curve shifts rightward accommodating the shift in IS.

Graph IS/LM representing these interactions:

\text{Graph Explanation:}

- Axis same as IS/LM graph (Interest rate on Y, Income on X).

Answer: Graph with both IS and LM shifts accommodating new fiscal policy.

[Step-by-Step]

Exercise No. 1:

1. Initial exchange rate:

2. Current exchange rate:

Graph IS/LM and money market:

Given the fixed exchange rate:

1. Due to deviation from the fixed exchange rate, the monetary authority must intervene by decreasing the money supply.

2. Money supply affects LM curve.

3. Graph IS/LM representing decreased money supply shifts LM leftward.

Answer: Graph showing changed interest rates with LM curve shift.

Exercise No. 2:

1. Expansionary fiscal policy stimulates aggregate demand shifting IS curve rightward.

2. In open economies with full capital mobility and fixed exchange rates:

- Increased income raises demand for money.

- Central bank intervenes to maintain exchange rate by increasing money supply.

3. LM curve shifts rightward accommodating the shift in IS.

Graph IS/LM representing these interactions:

- Axis same as IS/LM graph (Interest rate on Y, Income on X).

Answer: Graph with both IS and LM shifts accommodating new fiscal policy.

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