Consider the following small open economy: Cd = 200 + 0.69Y 1d = 80 – 1000r G = 20 NX = 85 -0.09Y - e a) Suppose that the economy has a fixed exchange rate: ē = 80 Derive the open economy IS curve with r on the left hand side and Y on the right hand side for the fixed exchange rate economy. b) Solve for the level of output in a long run equilibrium if r=0.05. c) Now suppose that the world interest rate is given by r=0.1 and the economy has a floating exchange rate. What must the nominal exchange rate, e, be in a long run general equilibrium? Assume the level of output in part d) Use this model to discuss the short run and long run effects of an increase in government purchases on output and the real interest rate in both the fixed and flexihle exchange rate cases.

Consider the following small open economy: Cd = 200 + 0.69Y 1d = 80 – 1000r G = 20 NX = 85 -0.09Y - e a) Suppose that the economy has a fixed exchange rate: ē = 80 Derive the open economy IS curve with r on the left hand side and Y on the right hand side for the fixed exchange rate economy. b) Solve for the level of output in a long run equilibrium if r=0.05. c) Now suppose that the world interest rate is given by r=0.1 and the economy has a floating exchange rate. What must the nominal exchange rate, e, be in a long run general equilibrium? Assume the level of output in part d) Use this model to discuss the short run and long run effects of an increase in government purchases on output and the real interest rate in both the fixed and flexihle exchange rate cases.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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