This assessment comprises two parts Part 1: The Brexit referendum of June 2016 triggered a sharp depreciation of sterling. Use the open economy AD-AS model to analyses a sudden depreciation, from the perspective of a small-open economy with a flexible exchange rate. You should find that Part 1 is asking something quite straightforward. Make some assumptions about what is happening in your ‘model world’, and then apply the mechanics of the model. For example, the depreciation is due to capital outflows (markets selling GBP), but what triggers those outflows? From there, use the model to analyses the situation, paying particular attention to what the model, under your assumptions, says about output and inflation in the short, medium and long-run. Part 2: Our open-economy IS-TR-IFM/AD-AS framework has competitiveness playing a major role in changing output in the model economy (when the [real] exchange rate depreciates the economy booms, due to improved competitiveness, and vice versa). Drawing on relevant theory and real-world data, critique the limitations of this simple view that changes in the exchange rate lead, via changes in competitiveness, to changes in net exports, and therefore output. In open-economy AD-AS, changes in output are driven by changes in competitiveness. However, is it that straightforward in reality? For example, the UK has experienced two significant depreciations (following the Global Financial Crisis, and more recently at the time of the BREXIT referendum). Did output behave as our open-economy AD-AS model predicts? What does economic theory have to say about what else is going on? There is no ‘correct’ answer to this part. We are looking to see what you can come up with, and for you to present your findings and thoughts in a scholarly way. How does this assessment fit into the module, and your continued study of economics? A key theme of the later part of this module is the role capital flows play in determining exchange rates. As we have seen, this has implications for the usefulness of fiscal and monetary policy, and provides a starting point for considering a range of contemporary economic events (including notably the path towards BREXIT and the structure of the Eurozone). By engaging with this in assessment, you will be: • Building your understanding of open-economy macroeconomics • Building your contemporary knowledge of the period following the UK’s vote to leave the European Union contemporary economic knowledge [i.e. awareness and understanding of recent economic events] is a key attribute employers look for in economics graduates (and, importantly, which feel graduates lack)
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