Question

For questions 1 through 9, suppose the structure of an economy with a flexible exchange rates is represented by the following equations: C = 400 + 0.85*(Y – T) L(r, Y) = 0.25*Y – 25*r T = 200 MS /P = 2250 I = 1700 – 25*r G = 1800 NX = 900 – 200*e where e represents the real exchange rate

1. Intuitively, the real exchange rate affects net exports (NX)

(a) negatively because real depreciations (e↓) make domestic goods less competitive

(b) negatively because real appreciations (e↑) have negative impacts on NX

(c) positively because real appreciations (e↑) have positive impacts on NX

(d) positively because real appreciations (e↑) make domestic goods more valuable

2. The equation for the IS curve is [HINT: Recall that the equilibrium in the goods market in open economy is Y = C + I + G + NX; solve for Y as a function of r and e]

(a) Y = [4630 – 25*r – 200*e]/0.15

(b) Y = 4430 – 25*r – 200*e

(c) Y = [4430 – 25*r – 200*e]/0.15

(d) Y = 4400 – 25*r – 200*e

3. The equation for the LM curve is [HINT: Recall that the equilibrium in the financial market is given by MS /P = L(r,Y); solve for Y as a function of r; no change here with respect to the closed-economy case]

(a) Y = 9000 – 100*r

(b) Y = 0.01*r – 90

(c) Y = 0.01*r + 90

(d) Y = 9000 + 100*r

When there is perfect capital mobility, the equilibrium in international capital markets implies that interest rates here and abroad must be equal; otherwise capital would continuously flow towards more profitable markets. That is, r = rf Assume that this is a small open economy so that it cannot control the foreign interest rate (rf ). That is, the interest rate is exogenous (i.e., determined outside the model). Notice that in this case, the equilibrium in the financial market (LM curve) is enough to determine equilibrium Y. 2

4. The equilibrium output (Y) for this economy if rf = 2 is

(a) 9200

(b) 9600

(c) 90.02

(d) 8800

5. Equilibrium consumption (C) is [HINT: Use the Y you found in question 4]

(a) 7710

(b) 7820

(c) 7850

(d) 8050

Answer #1

**1.**

The relationship between net export and the interest rate is negative. This is because, as real exchange rate rises, the currency appreciates, imports become cheaper and export expensive (because the foreigners have to give more per unit of domestic currency and this perceived as expensive imports). As imports become cheaper import rises and export falls on the other hand. This decreases net export. Then the relationship between net export and exchange rate is negative.

The correct option is
**(b)**

Consider the following economy (with flexible exchange rate
system):
• Desired consumption: Cd = 300 + 0.5Y − 2000r
• Desired investment: Id = 200 − 3000r
• Government purchases: G = 100
• Net export: NX = 350 − 0.1Y − 0.5e
• Real exchange rate: e = 20 + 1000r
• Full employment: Y ̄ = 900.
• Nominal money stock: M = 4354
• Real money demand: L = 0.5Y − 200r
(a) Find the equations for...

A small open economy with a flexible
exchange rate is in a recession and policymakers wish to promote
economic growth through higher trade - Goal: ↑NX to
↑Y. [20 points]
What policy or mix of policies – monetary,
fiscal, trade policy - should be implemented to reach this
goal?
Explain carefully the sequence of
events that will help NX and Y to grow [Hint: r <
or > r*, NCI or NCO, e↑ or e↓; ∆NX].

Assume the following equations summarize the structure of an
open economy:
C= 500 +
.9 (Y –
T)
Consumption Function
T = 300 +
.25
Y
Tax
I = 1000
– 50 i Investment equation
G =
2500
Government
Expenditures
NX = 505
Net Export
(M/P)d =
.4 Y -37.6 i Demand for Money (i= interest rate)
(M/p) s =
3000
Money Supply
5- Derive the equation for the LM curve.
6-...

Consider the following short-run, open economy model of the
economy.
Goods Market
C = 100 + 0.9(Y − T) I = 50 − 7.5r; NX = −50 G = 200; T =
100
Money Market
M = 4,000 P = 10 L(r, Y) = Y − 350r
a. (4 pts) Derive the IS and LM equations and put them on a
graph with the real interest rate (r) on the vertical axis and real
GDP (Y) on the horizontal axis....

2) Consider the following Keynesian model of the economy.
Consumption Function: C = 12 + .6 Y d,
Investment Function: I = 25 − 50 r,
Government Spending: G = 20,
Tax Collections: T = 20,
Money Demand Function: L d = 2 Y − 200 r,
Money Supply: M = 360,
Price Level: P = 2.
a) Find an expression for the IS curve and plot it.
b) Find an expression for the LM curve and plot it.
c)...

Suppose that economy of Portugal is characterized by the
following C = 200 + 0.5 (Y - T) Represents the consumption function
I = 600 – 30 r represents the investment function G = 300
represents the public spending T = 300 represents the level of
taxation (m/p)d = y - 40 r represents the money demand function
(m/p)s = 1500 r represents the real money supply d Y represents the
global output Find the IS curve the LM curve...

1- Suppose fiscal policy makers pass a budget that cuts taxes in
the current period and are expected to cut taxes in the future. Use
the IS-LM model to illustrate graphically and explain the effects
of this policy on current output and the current interest rate. 3-
What are the differences between the real exchange rate and nominal
exchange rate? 4- Explain the difference between gross domestic
product and gross national product 3- What are the differences
between the real...

Assume the following equations for the goods and money market of
an economy:
C = 250 + .8(Y-T)
I = 100 - 50r
T = G = 100.
Ms = 200
Md = 0.2Y – 100r
a) Derive the LM curve from the Md and Ms equations given above.
Is this upward or downward sloping? The LM curve is written as Y =
__ +/-__r.
b) Using the equation of the original IS curve and the LM curve
in part...

Suppose that in a closed economy with a public sector the
following relations apply: Consumption function: C = 200 + 0.60Yd
where (Υd = Y –T) Desirable investment: Ιp = 400 - 560r Government
expenditure: G = 250 Taxes: Τ = 50 Real money demand for
transactions: 0.5Y Real money demand for speculation: 600 - 2200r
Nominal amount of money: M = 1000 Price level: P = 1.25
A. Find the equilibrium in the commodity market (IS curve).
B. Find...

Consider the following Keynesian (short-run) model along with
the Classical (long-run) model of the economy.
Labor Supply: Le = 11
Capital Supply: K=11
Production Function:
Y-10K.3(Le).7
Depreciation Rate: &=.1
Consumption Function: C=12+.6Yd
Investment Function: I= 25-50r
Government Spending: G=20
Tax Collections: T=20
Money Demand Function: Ld=
2Y-200r
Money Supply: M=360
Price Level: P=2
Find an expression for the IS curve and plot it.
Find an expression for the LM curve and plot it.
Find the short run equilibrium level of...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago