Assessment 2: Note: In mentioned cases provide a neat diagram to explain your answer. Make sure to label axes properly. Else points will be deducted. The maximum possible points is 40. 1.
The following information is from International Business Times (April 4, 2012) "China has reacted to U.S. QE in the past by expressing dismay, primarily given the overweight U.S. dollar position in their foreign currency reserves." (Source: http://www.ibtimes.com/exnet/chinese-reaction-fed-qe3-not-happy-797141 ) Explain the dismay of Chinese government due to quantitative easing (QE) using the FOREX market model discussed in the class. Make sure that you consider the undervalued exchange rate of China while answering the question. Provide neat diagram (s) to explain your answer.
2. Let's assume the following information for an economy. C=10000+0.6Y I=2000 G=5000 X=600 M=400 [All the notations are standard as discussed in the class]
a. Find the size of the multiplier in this economy.
b. Find the short run equilibrium output.
3. The following news was issued in Bloomberg. "Thailand's baht fell for a second week to reach the lowest level since 2010 and the benchmark stock index led losses in Southeast Asia on concern worsening political unrest will spur further capital outflows". (http://www.bloomberg.com/news/2013-12-27/baht-falls-a-second-week-on-concern-protests-to-spur-outflows.html )
a. Why do you think that there is going to be capital outflow?
b. If indeed there is going to be huge capital flight, what should be the policy taken up by Bank of Thailand to avoid a free fall of their exchange rate and how they can achieve it (explain at least one instrument)?