Question

If a small economy can be described by the following equations:

C = 50 + 0.75 (Y − T)

I = 180 − 15r

NX =200−50ℇ

M/P =Y - 40r

T =200

G=200

M = 3000

P = 3 r ∗ =6

a. Derive and graph the specific IS *and LM* curves for this economy.

b. Calculate the equilibrium exchange rate, level of income, and net exports.

c. Assume a floating exchange rate. Calculate what happens to the exchange rate, the level of income, net exports, and the money supply if the government increases its spending by 50. Use a graph to explain what you find.

d. Now assume a fixed exchange rate. Calculate what happens to the exchange rate, the level of income, net exports, and the money supply if the government increases its spending by 50. Use a graph to explain what you find.

Answer 1