Write down a model that will allow you to analyze the BOP and exchange

Write down a model that will allow you to analyze the BOP and exchange rate in a monetary framework. Then, discuss the consequences of an increase in the foreign inflation rate under fixed, flexible, and managed floating systems.

What will be an ideal response?

ANSWER

R^ – E^ = P^F + Y^ – D^. If P^F increases, then with fixed rates R^ increases. With a float, E^ falls. With a managed float, (R^ – E^) increases with both R^ increasing and E^ falling.