Question

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 NX (r, Y) and Sd(r, Y) − Id(r) and show the graph characterizing goods market equilibrium for the given full-employment output level. (5 points)
(b) What are the equilibrium values of the real interest rate, the real exchange rate, and net exports? (8 points)
(c) Present the goods market equilibrium condition graphically while depicting all the possible points and intersections using their correct values (5 points)
(d) Find IS equation (2 points)
(e) Determine the LM equation using the GE price level (4 points)
(f) Using the IS-LM-FE model, evaluate the effects of a rise in full employment output to Y ̄ = 940 (12 points)
Short run effects on the real interest rate, exchange rate, net export, real money demand (6 points)
Long-run effects on of the above and the price level. (6 points)
Note that you have to who the effects by calculating the values of the respective variables
(g) Show the short-run and long-run effects of a rise government expenditure to 120 (8 points)
(h) Show the short-run and long-run effects of a rise in money supply to 6531. (8 points)

Answer 1