The following Mundell-Fleming model of a small, open economy will be used in all numerical exercises. It assumes a short-run framework in which prices are constant and output is demand-determined. C = 200 + 0.8(Y − T) I = 500 − 30r NX = 10 − 100e M/P = 50 + Y − 60r r = 2 G = 200 T = 100 M = 4000 P = 2 a.)Suppose that households become less confident about the future and reduce their autonomous level of consumption from 200 to 150. Solve for the new values of e, Y and NX. With the help of graphs, explain very carefully the mechanisms by which a new equilibrium is reached. b.) Suppose that with all exogenous variables at their original values, the autonomous part of money demand increases to 70. Solve for the new values of e, Y and NX. With the help of graphs, explain very carefully the mechanisms by which a new equilibrium is reached. c.) Based on your answers to parts (a) and (b), evaluate the role of floating rates as automatic stabilisers when exogenous shocks hit the economy.
The following Mundell-Fleming model of a small, open economy will be used in all numerical exercises. It assumes a short-run framework in which prices are constant and output is demand-determined.
C = 200 + 0.8(Y − T)
I = 500 − 30r
NX = 10 − 100e
M/P = 50 + Y − 60r
r = 2
G = 200
T = 100
M = 4000
P = 2
a.)Suppose that households become less confident about the future and reduce their autonomous level of consumption from 200 to 150. Solve for the new values of e, Y and NX. With the help of graphs, explain very carefully the mechanisms by which a new equilibrium is reached.
b.) Suppose that with all exogenous variables at their original values, the autonomous part of money demand increases to 70. Solve for the new values of e, Y and NX. With the help of graphs, explain very carefully the mechanisms by which a new equilibrium is reached.
c.) Based on your answers to parts (a) and (b), evaluate the role of floating rates as automatic stabilisers when exogenous shocks hit the economy.
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