Assume a Keynesian model of a small open economy. The world interest rate is given rw = 0.05. Money demand is given by the equation: Md = 20+0.5Y –40rw. Money supply is 800. The marginal propensity of consumption is 0.8. (a) Find the equation for the LM curve. (b) Find Y . (c) Assume the economy has flexible exchange rates and prices. Suppose the government were to cut spending by 5. i. How much and in what direction does the IS shift? Be precise. ii. What is the new value of Y ? 1/3 Due on Monday, 11/16 @ 9:00 a.m. iii. Has the exchange rate appreciated, depreciated, or stayed the same? (d) Assume the economy has fixed exchange rates and prices. Suppose the government were to cut spending by 5. i. How much and in what direction does the IS shift? Be precise. ii. What is the new value of Y ? iii. What is the new value of the Money supply?
Assume a Keynesian model of a small open economy. The world interest rate is given rw = 0.05. Money demand is given by the equation: Md = 20+0.5Y –40rw. Money supply is 800. The marginal propensity of consumption is 0.8.
(a) Find the equation for the LM curve.
(b) Find Y .
(c) Assume the economy has flexible exchange rates and prices. Suppose the government were to cut spending by 5. i. How much and in what direction does the IS shift? Be precise. ii. What is the new value of Y ? 1/3 Due on Monday, 11/16 @ 9:00 a.m. iii. Has the exchange rate appreciated,
(d) Assume the economy has fixed exchange rates and prices. Suppose the government were to cut spending by 5. i. How much and in what direction does the IS shift? Be precise. ii. What is the new value of Y ? iii. What is the new value of the Money supply?
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