Consider the Mundell-Fleming short-run model of a small open economy under fixed exchange rates described by the following equations (1) through (7). Assume that there are free capital flows and that interest rate parity holds so that r = r*where r = 5 is the world interest rate. (1) C = 400+0.8 (Y-T); (2) I=850-60r"; (3) G=1200; (4) T=1000+ 0.25 Y; (5) NX = 600-200e; (6) Y=C+I+G+NX; (7) (M/P)=0.5Y -50r. Equation (6) is the goods market equilibrium condition (IS* equation), while equation (7) is the LM equation. The fixed domestic price level is P = 2 while the foreign price level is P=1. In equation (5), e is the nominal exchange rate. Suppose that the Central Bank decides to fix the nominal exchange rate at efix= 3. Then the domestic money supply M and the equilibrium output level Y* must be such that a) M =5000; Y* - 5500. b) M=6250; Y = 6750 c) M-2875: Y-3375 Od) Y* stays constant as the Central Bank adjusts the money supply to stabilize output.

Consider the Mundell-Fleming short-run model of a small open economy under fixed exchange rates described by the following equations (1) through (7). Assume that there are free capital flows and that interest rate parity holds so that r = rwhere r = 5 is the world interest rate. (1) C = 400+0.8 (Y-T); (2) I=850-60r"; (3) G=1200; (4) T=1000+ 0.25 Y; (5) NX = 600-200e; (6) Y=C+I+G+NX; (7) (M/P)=0.5Y -50r. Equation (6) is the goods market equilibrium condition (IS equation), while equation (7) is the LM equation. The fixed domestic price level is P = 2 while the foreign price level is P=1. In equation (5), e is the nominal exchange rate. Suppose that the Central Bank decides to fix the nominal exchange rate at efix= 3. Then the domestic money supply M and the equilibrium output level Y* must be such that a) M =5000; Y* - 5500. b) M=6250; Y = 6750 c) M-2875: Y-3375 Od) Y* stays constant as the Central Bank adjusts the money supply to stabilize output.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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