Answer to Question #156574 in Macroeconomics for athirah

Question

Malaysia adopts a fixed exchange rate system in its trade with Pakistan. Assume that the Pakistani government decides to reduce import of palm oil from Malaysia. Explain and show the effect on equilibrium level of exchange rate between Malaysian Ringgit-Pakistan Rupee (MYR / RP), the values of the Malaysian Ringgit and Pakistan Rupee as well as the supply of Malaysian money.

(4 markah/marks)

A country adopts a flexible exchange rate system with imperfect capital mobility and capital flows are sensitive to changes in interest rates. Following the Covid-19 pandemic, the balance of payments was in a deficit position. Thus, the country intends to stimulate economic growth by reducing the required reserves ratio. Using IS-LM-BP analysis, show and explain the effectiveness of this policy in influencing the aggregate output level.

 

(7 markah/marks)

Answer 1

Answer :

fixed exchange rate : fixed exchange rate refers to rate of exchange as fixed by government ex....

If UK (pond) =4g of gold, US&=2g of gold

So, UK£ and US($) =1:2

According to the question

Pakistan government decide to reduce import to palm oil from Malaysia.

Due to fixed exchange rate there will be no effect from expansionary or contractiory monetary policy in this system

1) No effect on exchange rate

2) Domestic money supply unchanged the foreign exchanged market is in equilibrium.

When the expected return on domestic and foreign currency bonds are the same.

Second part

According to the question :

1)In flexible exchange rate (determine by market forces) less than perfect capital mobility

2) Imperfect capital mobility : this means that fiscal expansion causes a capital inflow as well  as a trader balance deterioration.

3)

By observing the diagram we can judge the condition and policy effect in covid 19

a) IS shift right ward that is indicate consumption low investment low public spending high and net import

Result is that

Outflow >inflow

Less production... Low output

Market dis balance