--%>
Assignment Help - homework help

Open-Economy Macroeconomics

Open-Economy Macroeconomics

 

Suppose the structure of an economy with a flexible exchange rates is represented by:

 

C = 200 + 0.85*(Y - T)                                                    L(r, Y) = 0.25*Y - 25*r

T = 200                                                                                                      MS/P = 2250

I = 1700 - 25*r

G = 1800

NX = 900 - 200*e                        where e represents the real exchange rate.

 

(a)    Explain intuitively why net exports (NX) depend negatively on the real exchange rate.

 

 

 

(b)   Derive the equation for the IS curve.

[HINT: Recall that the equilibrium in the goods market for an open economy is given

by Y = C + I + G + NX; then solve for Y as a function of r and e]

 

 

(c)    Derive the equation for the LM curve.

[HINT: Recall that the equilibrium in the financial market is given by MS/P = L(r,Y); then solve for Y as a function of r]

 

 

(d)   When there is perfect capital mobility, it is possible to assume that the equilibrium in international capital markets implies that interest rates here and abroad must be equal.  That is,

 

r = rf

 

Otherwise, capital would move towards more profitable markets.  Assume that this economy cannot control the foreign interest rate (rf).  That is, the interest rate is exogenously determined (i.e., determined outside the model).  Notice that in this case, the equilibrium in the financial market (the LM) is enough to determine equilibrium Y.  Calculate equilibrium Y if rf = 2.

 

 

(e)    Calculate equilibrium C, I and NX. [HINT: Knowing Y and r, it is possible to pin down C and I.  Also, with Y, C, I and G and knowing that Y = C + I + G + NX, can pin down NX]

 

 

(f)    What is the value of e that guarantees equilibrium in the goods market? Now, we will study the impact of fiscal and monetary policy for both a flexible exchange rate regime (or "free floating") and a fixed exchange rate regime (or "peg").

 

Flexible Exchange Rates

 

(g)   Suppose G increases by 90.  Assuming flexible exchange rates, show graphically what happens after a expansionary fiscal policy.  Does equilibrium Y output increase?  Why?  Calculate the new equilibrium output.

 

 

   Related Questions in Macroeconomics

  • Q : Purchasing and consumption of

    The usual household maximizes the utility by spending all its money to purchase and consume a combination of goods which yields: (1) Fundamental physiological requirements and customary wants. (2) Maximum status and the social prestige. (3) Complete satisfaction of al

    		•
  • Q : When price of demand curve modified

    Whenever the price of a good all along a demand curve is modified since of a change in supply, the substitution effect is the modification in purchases of a good which result from a change merely in: (1) The associative price of that good. (2) Consumer tastes and prio

    		•
  • Q : Merger and acquisition of firms

    Question: Suppose firm 1 and firm 2 merge. Call the new firm A. It has output xA and profit πA. Suppose there is Cournot competition after the merger. For now, we assume that the marginal cost of Firm A, the mer

    		•
  • Q : Principles of macroeconomics Explain

    Explain the concept of “economies of scale” and “increasing returns”.

    		•
  • Q : The market system 1. Examples of

    1. Examples of command economies are: A. The United States and Japan. B. Sweden and Norway. C. Mexico and Brazil. D. Cuba and North Korea.

    		•
  • Q : Calculating exchange rate 10 US dollars

    10 US dollars are exchanged for 500 Indian rupees. Calculate the exchange rate for Indian currency? Answer: $1 = 500/10 = Rs.50, that is, $1 = Rs. 50

    		•
  • Q : Define Quantity of a good Quantity of a

    Quantity of a good: The quantity of a good which buyers demand is found out by the price of the good, income, the prices of associated goods, expectations, tastes, and the number of buyers.

    		•
  • Q : Greatest Consumer Surplus problem I

    I have a problem in economics on Greatest Consumer Surplus. Please help me in the following question. Usual Americans undoubtedly derive the greatest consumer surpluses from the: (i) Summer vacations. (ii) Jelly and Peanut butter. (iii) Gold jewellery

    		•
  • Q : Assignment Task 1 – Commercial banks in

    Task 1 – Commercial banks in United Economy have total deposits of AED 300 billion. Their reserves are AED 15 billion, two- thirds of which are with the Central Bank as deposits. There are AED 30 billion notes outside the banks. There are no coins! Calculate- a) The monetary base. b) The bank

    		•
  • Q : Use the principles of supply and demand

    Use the principles of supply and demand to address a predetermined goal (set by the student) in the gasoline market. Be clear on what the current market indicates and why and what your future goal is.

    		•