Assume the following economic structure (similar to an open economy, which we discussed in the class, but with numerical values): C= 50 + 0.75 (Y - T) I= 200 - 20*r NX = 200 - 50*REER M P(d) = Y - 40*r(d) r(d) = r(f) + AREER G=T= 200, M = 3,000, P(d) = S, r(f) = foreign real interest rate = 5%, and REER = real exchange rate (P(d)E P() where P(d) = domestic price level, E = nominal exchange rate (AE >0 depreciating against foreign currencies), and P(f) = foreign price level = 1. The initial steady state AREER = 0. Answer the following questions: a. Using the above information, derive solutions for steady-state REER, Y, r(d), and NX [Hint: use money market condition to solve for Y first, and then IS curve to solve for REER.].

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
Assume the following economic structure (similar to an open economy, which we discussed in the class, but
with numerical values):
C = 50 + 0.75 (Y - T)
I= 200 - 20*r
NX = 200 - 50*REER
MP(d) = Y - 40*r(d)
r(d) = r(f) + AREER
G = T= 200, M = 3,000, P(d) = 3, r(f) = foreign real interest rate = 5%, and REER = real
%3D
exchange rate (P(d)/E P() where P(d) = domestic price level, E = nominal exchange rate
(AE > 0 depreciating against foreign currencies), and P(f) = foreign price level = 1. The initial
steady state AREER = 0. Answer the following questions:
a. Using the above information, derive solutions for steady-state REER, Y, r(d), and NX
Hint: use money market condition to solve for Y first, and then IS curve to solve for
REER.].
b. Assume that government spending increases by AG = 50 (without increase in
taxation). Calculate changes to REER, Y, NX, and M, if the exchange rate is floating.
c. Assume that government spending increases by AG = 50 (with an increase in taxes to
balance the budget). How would that impact your answers to part (b), if the exchange
rate is floating?
d. Assume that government spending increases by AG = 50 (without changes in
taxation). Calculate what happens to exchange rate, income, net exports, and money
supply if the exchange rate is fixed. [Hint: M is now endogenous and determined by
money market equilibrium.]
e. Assume that international interest rates, r(f) rise by 100 basis points. With the
exchange rate floating, how will this impact Y, REER, and NX?
Transcribed Image Text:Assume the following economic structure (similar to an open economy, which we discussed in the class, but with numerical values): C = 50 + 0.75 (Y - T) I= 200 - 20*r NX = 200 - 50*REER MP(d) = Y - 40*r(d) r(d) = r(f) + AREER G = T= 200, M = 3,000, P(d) = 3, r(f) = foreign real interest rate = 5%, and REER = real %3D exchange rate (P(d)/E P() where P(d) = domestic price level, E = nominal exchange rate (AE > 0 depreciating against foreign currencies), and P(f) = foreign price level = 1. The initial steady state AREER = 0. Answer the following questions: a. Using the above information, derive solutions for steady-state REER, Y, r(d), and NX Hint: use money market condition to solve for Y first, and then IS curve to solve for REER.]. b. Assume that government spending increases by AG = 50 (without increase in taxation). Calculate changes to REER, Y, NX, and M, if the exchange rate is floating. c. Assume that government spending increases by AG = 50 (with an increase in taxes to balance the budget). How would that impact your answers to part (b), if the exchange rate is floating? d. Assume that government spending increases by AG = 50 (without changes in taxation). Calculate what happens to exchange rate, income, net exports, and money supply if the exchange rate is fixed. [Hint: M is now endogenous and determined by money market equilibrium.] e. Assume that international interest rates, r(f) rise by 100 basis points. With the exchange rate floating, how will this impact Y, REER, and NX?
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Rule of 70
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education