E- 10 + 0.5Y = 160 - 50r NX = 80 - 0.1Y - e e = 50 - 0.1Y + B (r – r*) G= 10 vhere C is consumption, I is investment, Y is dom estic output, r is the domestic real interest rate, NX is net exports, e is the real exchange rate, G is government spending and r* is the oreign real interest rate. a) Suppose that ß is fairly small, ß = 5, full employment output is Y = 400 and r* = 0.1. What s the equilibrium value of the domestic interest rate, r? b) Consider instead that ß is fairly large, ß = 1000, where again Y = 400 and r* = 0.1. What is he equilibrium value of the domestic interest rate? c) What happens tor as ß increases? Does r converge to r* as ß approaches infinity? What ype of small open economy model does this resemble?

E- 10 + 0.5Y = 160 - 50r NX = 80 - 0.1Y - e e = 50 - 0.1Y + B (r – r) G= 10 vhere C is consumption, I is investment, Y is dom estic output, r is the domestic real interest rate, NX is net exports, e is the real exchange rate, G is government spending and r is the oreign real interest rate. a) Suppose that ß is fairly small, ß = 5, full employment output is Y = 400 and r* = 0.1. What s the equilibrium value of the domestic interest rate, r? b) Consider instead that ß is fairly large, ß = 1000, where again Y = 400 and r* = 0.1. What is he equilibrium value of the domestic interest rate? c) What happens tor as ß increases? Does r converge to r* as ß approaches infinity? What ype of small open economy model does this resemble?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The following equations describe a small open-economy:
C = 10 + 0.5Y
I = 160 - 50r
NX = 80 - 0.1Y - e
e = 50 - 0.1Y + B (r-r*)
G= 10
where C is consumption, I is investment, Y is domestic output, r is the domestic real interest
rate, NX is net exports, e is the real exchange rate, G is government spending and r* is the
foreign real interest rate.
(a) Suppose that ß is fairly small, ß = 5, full employment output is Y = 400 and r* = 0.1. What
is the equilibrium value of the domestic interest rate, r?
(b) Consider instead that ß is fairly large, B = 1000, where again Y = 400 and r* = 0.1. What is
the equilibrium value of the domestic interest rate?
(c) What happens to r as ß increases? Does r converge to r* as ß approaches infinity? What
type of small open economy model does this resemble?

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