MAE 302 The Short Run Stickiness Model of Exchange Rate Question


MAE 302
T1, 2022
Macroeconomics of Open Economies
14th April 2022, 8PM
Learning Outcome Details
Unit Learning Outcome (ULO)
Graduate Learning Outcome
ULO 1: apply macro-economic theory to analyse
contemporary economic issues;
ULO 3: understand the foreign exchange market
GLO1: Discipline-specific
knowledge and capabilities
GLO 5: Problem solving
Assessment Feedback:
Students who submit their work by the due date will receive their marks and feedback on
CloudDeakin on 2nd May 2022, 11:59PM.
Description / Requirements
Answer all three questions.
In all answers, use figures if necessary. No referencing required if only the prescribed textbook is
consulted. For other sources, use references.
Submission Instructions
You must submit an electronic copy to DeakinCloud.
Any work you submit may be checked by electronic or other means for the purposes of detecting
collusion and/or plagiarism.
Deakin’s Bachelor of Commerce and MBA are internationally EPAS accredited.
Deakin Business School is accredited by AACSB.
1. In the exchange rate model with short-run price stickiness, the nominal interest rate decreases
immediately if there is a permanent increase in money supply. However, the model of monetary
approach to the exchange rate suggests that the interest rate rises when there is a permanent
increase in the growth rate of money supply. Explain how the different assumptions in these two
models lead to contrasting predictions about the response of interest rates to the money supply.
Show the relevant long-run time paths of the interest rate, price level and nominal exchange rate in
each model. (8 mark)
2. Analyze the effects of a temporary increase in the European money supply on the dollar/euro
exchange rate using both the Australian money market and the foreign exchange market. Explain.
(4 marks)
3. Discuss the short run and the long run effect of a permanent exogenous decrease in foreign
money demand on the domestic money market and the foreign exchange market. (8 marks)

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shown in hours on Cloud Deakin Drop Box)
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day on Cloud Deakin Drop Box)
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5 days late. Submitted after [Time, date but before Time, Date]. Penalty 25/100. (shown as 4 days on cloud Deakin Drop Box)
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CloudDeakin unit site.
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