The following Mundell-Fleming model of a small, open economy will be used in all numerical exercises. It assumes a short-run framework in which prices are constant and output is demand-determined. C=200+0.8(Y-T) I=500-30r NX=10-100e M/P=50+Y-60r r=2 G=200 T=100 M=4000 P=2 The above values of exogenous variables will be referred to as their original values in the questions below. For this question, assume that the exchange rate is floating. (a) Derive the equilibrium equations for IS* and LM* , sketch a graph of the two equations and solve for the equilibrium values of Y, e and NX.
The following Mundell-Fleming model of a small, open economy will be used in all numerical exercises. It assumes a short-run framework in which prices are constant and output is demand-determined.
C=200+0.8(Y-T)
I=500-30r
NX=10-100e
M/P=50+Y-60r
r=2
G=200
T=100
M=4000
P=2
The above values of exogenous variables will be referred to as their original values in the questions below.
For this question, assume that the exchange rate is floating. (a) Derive the equilibrium equations for IS* and LM* , sketch a graph of the two equations and solve for the equilibrium values of Y, e and NX.
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1) In the IS equation why wasnt G in the calculations.
2)Suppose that with all exogenous variables, including T and M at their original values, households become less confident about the future and reduce their autonomous level of consumption from 200 to 150. Solve for the new values of e, Y and NX. With the help of graphs, explain very carefully the mechanisms by which a new equilibrium is reached.
3)Suppose that with all exogenous variables at their original values, the autonomous part of money demand increases to 70. Solve for the new values of e, Y and NX. With the help of graphs, explain very carefully the mechanisms by which a new equilibrium is reached.
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