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. a) Find short-run equilibrium level of output (Y) and trade balance (NX). Is there a trade deficit or surplus? b) Assume the governent cuts tax level to ?′ = 400. What is the new short run equilibrium level of output (?′) and trade balance (NX'). Is this economy suffering from twin deficits (trade and budget). What policy change could help? c) what is the value of the fiscal multiplier fromt he tax cut? if it were a closed economy would it be greater or smaller?
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.
a) Find short-run equilibrium level of output (Y) and trade balance (NX). Is there a
b) Assume the governent cuts tax level to ?′ = 400. What is the new short run equilibrium level of output (?′) and trade balance (NX'). Is this economy suffering from twin deficits (trade and budget). What policy change could help?
c) what is the value of the fiscal multiplier fromt he tax cut? if it were a closed economy would it be greater or smaller?
d) What effects will the tax cuts have on investments and on the trade balance in the medium run?
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