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Question 1 A small open economy with perfect capital mobility is characterised by the following equations M₁ = 2Ỹ - 50i St+1- St -4= St Assume that the nominal money supply M, is 80, output Ŷ is 22, and that the foreign interest rate is it is 0.08. In the long-run, we have σ = 1 where SP ེ࿄ And the foreign price level P* is 4.2. a) Identify and explain the equations above. b) Draw the MM and PPP schedules, explaining why their slopes are positive or negative. c) Calculate the long-run equilibrium values for S and P. d) Suppose we are at this long-run equilibrium but now the central bank increases the nominal money supply by 5%. Calculate the new long-run equilibrium. e) What happens to the nominal exchange rate S, in the short-run? f) Explain intuitively why overshooting takes place. How much overshooting has taken place in this example?

Question 1 A small open economy with perfect capital mobility is characterised by the following equations M₁ = 2Ỹ - 50i St+1- St -4= St Assume that the nominal money supply M, is 80, output Ŷ is 22, and that the foreign interest rate is it is 0.08. In the long-run, we have σ = 1 where SP ེ࿄ And the foreign price level P* is 4.2. a) Identify and explain the equations above. b) Draw the MM and PPP schedules, explaining why their slopes are positive or negative. c) Calculate the long-run equilibrium values for S and P. d) Suppose we are at this long-run equilibrium but now the central bank increases the nominal money supply by 5%. Calculate the new long-run equilibrium. e) What happens to the nominal exchange rate S, in the short-run? f) Explain intuitively why overshooting takes place. How much overshooting has taken place in this example?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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i need Solution of Part d,e,f

Question 1 A small open economy with perfect capital mobility is characterised by the following equations M = 2Ỹ – 50i S1+1 – S i; - i = Assume that the nominal money supply M; is 80, output Ÿ is 22, and that the foreign interest rate is i; is 0.08. In the long-run, we have o = 1 where SP And the foreign price level P* is 4.2. a) Identify and explain the equations above. b) Draw the MM and PPP schedules, explaining why their slopes are positive or negative. c) Calculate the long-run equilibrium values for S and P. d) Suppose we are at this long-run equilibrium but now the central bank increases the nominal money supply by 5%. Calculate the new long-run equilibrium. e) What happens to the nominal exchange rate S, in the short-run? f) Explain intuitively why overshooting takes place. How much overshooting has taken place in this example?
Transcribed Image Text:Question 1 A small open economy with perfect capital mobility is characterised by the following equations M = 2Ỹ – 50i S1+1 – S i; - i = Assume that the nominal money supply M; is 80, output Ÿ is 22, and that the foreign interest rate is i; is 0.08. In the long-run, we have o = 1 where SP And the foreign price level P* is 4.2. a) Identify and explain the equations above. b) Draw the MM and PPP schedules, explaining why their slopes are positive or negative. c) Calculate the long-run equilibrium values for S and P. d) Suppose we are at this long-run equilibrium but now the central bank increases the nominal money supply by 5%. Calculate the new long-run equilibrium. e) What happens to the nominal exchange rate S, in the short-run? f) Explain intuitively why overshooting takes place. How much overshooting has taken place in this example?
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