2. A small open economy is described by the following equations: C = 60 +.75(Y - T) I= 150 - 20r NX 150 – 50e %3D MP = Y- 40r G= 1500 M= 2000 P = 2 R* = 5 Assume a balanced budget. a. Derive and graph the IS* and LM* curves. 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, and net exports if the government increases its spending by 50. Use a graph to explain what you find.

2. A small open economy is described by the following equations: C = 60 +.75(Y - T) I= 150 - 20r NX 150 – 50e %3D MP = Y- 40r G= 1500 M= 2000 P = 2 R* = 5 Assume a balanced budget. a. Derive and graph the IS* and LM* curves. 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, and net exports if the government increases its spending by 50. Use a graph to explain what you find.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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part C and D
Consider the following open economy. Real GDP Consumption Government Expenditures Investment Exports Taxes Transfers 1,000 800 115 280 22 195 79 What is net foreign investment (NFI)? Round to two decimal places, enter the negative sign if appropriate, and do not enter a currency symbol. If your answer is $1.125, enter 1.13.
(A) Government spending rises to 1,250. Compute the investment, trade balance, national savings and the equilibrium exchange rate and illustrate graphically. (B) Suppose that the world interest rate rises from 5 to 10 percent (G is again 1,000). Solve for national saving, investmentm trade balance and the equilibrium exchange rate. Explain what you find compared to part (A) and explain graphically.
Answer These Three Sub Parts i) In an open economy, Y = C + I + G + NX. Using symbols from this identity, write anexpression that defines national saving, S, in an open economy.S = _________________________ . ii) True or False? In an open economy, the following is always true: S = I + NCO, where I isinvestment spending and NCO is net capital outflow. iii) In an open economy, a country’s net capital outflow is:a.) the value of domestic assets purchased by foreigners minus the value of foreign assetspurchased by domestic residentsb.) the value of foreign assets purchased by domestic residents minus the value of domesticassets purchased by foreigners.
The smaller a nation's marginal propensity to import, the smaller the open-economy multiplier. True or false? Why?
Question 24 Consider the following data for an open economy. Y(GDP)= C= 80 |= 35 120 G= 10 NFIA= 10 T(TAX-TR-INT)= 12 Private savings is and the current account is O 18; -5 38; 5 O 22; -8 O 28; -5
Suppose the government share of GDP is 20 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 5 percent, respectively. If the dollar exchange rate increases, then we would expect the government share of GDP to increase. the interest rate to decrease. the interest rate to increase. the government share of GDP to decrease. the net export share of GDP to increase. OOO
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Suppose that the economy is in equilibrium with a trade deficit and that saving is greater than investment. According to the circular flow model, the government's budget a. must be in deficit b. must be in surplus c. must be balanced d. could be in a surplus or a deficit