3.
Suppose that a Keynesian model of fixed prices applies. Use the following to answer the
question below: \"T\" represents the tax burden, \"G\" is government spending, \"i\" is the interest
rate, \"PKA\" is the private capital account, \"CA\" is the current account balance, \"MS\" is the money
supply, and \"BOP\" is the balance of payments. Assume that \"e\" represents the price of the dollar
in terms of foreign currency:
Assume that the U.S. exchange rate is flexible and that there is a high degree of international
financial capital mobility.
a. Use a series of \"arrows\" as we did in class to show the impact of an increase in the U.S.
money supply. You do not need to explain but do need to have the sequence of events and
direction of changes noted accurately (10 points)
b. Use a graph to show this change in policy would affect the dollar-euro foreign exchange
market. Be sure to note whether there is excess supply or demand for dollars. (10 points)
c. Would your answer about excess supply/demand change in part b. change if there were
no international financial capital mobility? (5 points)
