Phillips Curve and International Macro
2 A 1991
The Wall Street Journal cover page article entitled “Foreign Rate
Increases May Worsen Slump” explained how the German central bank raised
domestic interest rates in order to reduce inflation below the 3% level At the
same time, the US central bank reduced domestic interest rates to fight the
deepening recession in the United States
a Explain
the pressures that rising German interest rates put on the other European Union
(EU) countries’ currencies Specifically, assume exchange rates within the EU
were absolutely fixed Explain the economic effects a rise in the real German
interest rate put on the DM/FF exchange rate and what the French central bank
(ie, the Bank of France) would have to do to keep the exchange rate fixed
b Explain
the economic effects the rise in German interest rates put on the DM/FF
exchange rate and what the German central bank (ie, the Bundesbank) would
have to do to keep the exchange rate fixed
d What is
the Phillips Curve? Are your results in question (1a) consistent with the
Phillips Curve?
3 In 1991,
Argentina adopted a currency board that had the responsibility to maintain a
fixed exchange rate between the Argentine peso and the US dollar ($1 = 1
Argentine Peso) Through the Convertibility Law, Argentina also established
that each peso in circulation had to be 100% collateralized with reserves in
the Central Bank, assuring 100% coverage of Argentine monetary base Assume the
government promised to reduce the surging unemployment rate by trying to
stimulate significant new economic growth by means of expansionary monetary
policy Since it would be constrained by the Convertibility Law from increasing
the monetary base, suppose the central bank expanded the money supply by
reducing the reserve ratio Explain the economic effects that expansionary
monetary policy would have on Argentina’s real and nominal GDP, monetary base,
money supply, real and nominal interest rates, current account, financial
account, level of international reserves, real investment spending,
unemployment rate, inflation rate, and velocity of money