Assume that an open economy with a floating exchange rate is described by the equations: C = 0.85(Y-T)T= 1000I= 1500 -200r G= 3000NX= 2000 – 250e (M/P)d = 0.4Y – 500r M= 4000S-I= 750 – 250rP= 2r* = 4 Derive the equation for the IS* curve. Derive the equation for the LM curve. Solve for Y. Solve for NX and e.     Using the information from parts a. to d. above, graphically illustrate on a clearly labelled diagram, the short-run impact of contractionary fiscal policy on the exchange rate and level of output in this small open economy.  Assuming that the economy adopted a fixed exchange rate system, illustrate on a clearly labelled diagram, the impact of contractionary fiscal policy.  In one sentence, explain the type of intervention needed to maintain the fixed exchange rate proposed in part f. above.

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Assume that an open economy with a floating exchange rate is described by the equations: C = 0.85(Y-T)
T= 1000
I= 1500 -200r

G= 3000
NX= 2000 – 250e (M/P)d = 0.4Y – 500r M= 4000
S-I= 750 – 250r
P= 2
r* = 4

  1. Derive the equation for the IS* curve.

  2. Derive the equation for the LM curve.

  3. Solve for Y.

  4. Solve for NX and e.

 
 
  1. Using the information from parts a. to d. above, graphically illustrate on a clearly labelled diagram, the short-run impact of contractionary fiscal policy on the exchange rate and level of output in this small open economy. 

  2. Assuming that the economy adopted a fixed exchange rate system, illustrate on a clearly labelled diagram, the impact of contractionary fiscal policy. 

  3. In one sentence, explain the type of intervention needed to maintain the fixed exchange rate proposed

    in part f. above.

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