Consider the following: C = 400 + 0.5·(Y – T) I = 80 + 0.1·Y – 1000·(i – πe + x) NX = 0.01·Y*– 0.1·Y – 4·(E – 100) G = 600 T = 480 Y* = 20,000 The central bank anchored inflation expectations at target inflation rate of π̅= 0.02. Household borrowing rates and businesses include a 4% risk premium over policy rate (i) so: x - 0.04. The central bank has set policy rate equal to 2% (, ī = 0.02). The Exchange rate (E) is 100. Expected future exchange rate is also 100. Then assume the governent cuts tax level from T=480 to T′ = 400: a) Find the short run equilibrium level of output and trade balance? a) If the economy was at potential before, what effects will the tax cut form 480 to 400 have on investments and on trade balance in the medium run?
Consider the following:
C = 400 + 0.5·(Y – T)
I = 80 + 0.1·Y – 1000·(i – πe + x)
NX = 0.01·Y*– 0.1·Y – 4·(E – 100)
G = 600
T = 480
Y* = 20,000
The central bank anchored inflation expectations at target inflation rate of π̅= 0.02. Household borrowing rates and businesses include a 4% risk premium over policy rate (i) so: x - 0.04. The central bank has set policy rate equal to 2% (, ī = 0.02). The Exchange rate (E) is 100. Expected future exchange rate is also 100.
Then assume the governent cuts tax level from T=480 to T′ = 400:
a) Find the short run equilibrium level of output and trade balance?
a) If the economy was at potential before, what effects will the tax cut form 480 to 400 have on investments and on trade balance in the medium run?
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