Consider a small open economy given by the following:
Consumption Function: Ct = 17.2 + 0.7(Yd)t
Investment Function: It = 24 -100rt
Real Demand for Money: Lt = 6Yt-1400r
Net Exports Schedule: NXt = 8 – 4et
Government Spending: G0 = 36
Tax Collections: T0 = 36
World Interest Rate: r0 = 0.15
Price Level: P0 = 4
Domestic Money Supply: M0 = 2520
Assume further that the economy is currently at the long-run equilibrium.
(10 points) Graph the situation of this economy in the IS-LM and IS*-LM* diagrams
(10 points) Find the equilibrium level of output, consumption, investment, net exports, interest rates and exchange rate.
(10 points) Suppose that the Government increases Taxes to 40. What would be the new equilibrium level of ouput, exchange rate and interest rate ?
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