A small open economy is described by the following equations: C = 60 +.75(Y - T) I = 150 - 20r NX = 150 – 50e M/P = 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.

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A:

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