A small open economy with fixed prices can be described by the income-expenditure model: Consumption: C- 700 + 0.8YD: where YD - disposable income Planned investment: Iplanned" 800 - 600i, where i -interest rate Тахes: T- 420 + 0.06Y Transfers: TR - 400 - 0.04Y Government spending: G- 468 Еxports: X- 400 - 10E,rc/pc Imports: IM - 200 + 0.12Y + 30E.c/pc NOTE: YD - disposable income. Unless otherwise stated, interest rate, i, is held constant at 0.1 (i.e., it should be interpreted as 10%) and exchange rate, ErC/pc, is held constant at 10 (FC per DC). Part (a) Find the equilibrium levels of output and (government) budget balance. Part (b) Initially, the economy is in its equilibrium as shown in part (a). Recently, the domestic government raised import tariffs. As a result, autonomous imports change by 22 units. In addition, this change in trade policy will cause the interest rate to change by 1 percentage points and the exchange rate to change by 0.2 FC per DC. Find the new equilibrium levels of output, planned investment, and budget balance. Answers:
A small open economy with fixed prices can be described by the income-expenditure model: Consumption: C- 700 + 0.8YD: where YD - disposable income Planned investment: Iplanned" 800 - 600i, where i -interest rate Тахes: T- 420 + 0.06Y Transfers: TR - 400 - 0.04Y Government spending: G- 468 Еxports: X- 400 - 10E,rc/pc Imports: IM - 200 + 0.12Y + 30E.c/pc NOTE: YD - disposable income. Unless otherwise stated, interest rate, i, is held constant at 0.1 (i.e., it should be interpreted as 10%) and exchange rate, ErC/pc, is held constant at 10 (FC per DC). Part (a) Find the equilibrium levels of output and (government) budget balance. Part (b) Initially, the economy is in its equilibrium as shown in part (a). Recently, the domestic government raised import tariffs. As a result, autonomous imports change by 22 units. In addition, this change in trade policy will cause the interest rate to change by 1 percentage points and the exchange rate to change by 0.2 FC per DC. Find the new equilibrium levels of output, planned investment, and budget balance. Answers:
Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?
Section: Chapter Questions
Problem 4TY
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