--%>

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 : Expanding consumption of a good I have

    I have a problem in economics on Expanding consumption of a good. Please help me in the following question. Your consumption of a good tends to expand if it’s: (i) Relative marginal utility surpasses its relative price. (ii) Total utility is les

  • Q : Problem on full employment Does full

    Does full employment take place if AD = AS or S = I?

  • Q : Control of Inflation Economists agree

    Economists agree that inflation beyond a moderate rate is undesirable as it can often prove disastrous and therefore, it must be kept under control. Economists agree also that an appropriate mix of fiscal and monetary policies can be helpful in controlling inflation.

  • Q : Income approach to evaluate national

    Explain in short the income approach to evaluate national income. Answer: Under income method to compute the National Income, the steps given below have been taken into account: A) First of all production units tha

  • Q : Federal fiscal stimulus in 2009

    Question: Was the stimulus package passed in 2009 as success?  In answering this question the focus should be the articles on the syllabus, but you should also include opinions of other commentators. &nbs

  • Q : Consumer Surplus definition Can someone

    Can someone help me in finding out the right answer from the given options. The basic difference between the dollar amounts people would willingly to pay for a particular quantity of a good and the amounts that they do pay at a particular market price is termed as: (1

  • Q : Macro economics policy (a) Do you think

    (a) Do you think that macroeconomic policy should be designed to achieve a measured unemployment rate of zero? Why or why not should this be the case?

  • Q : Demand-pull inflation What is

    What is "demand-pull" inflation?

  • Q : Okuns law Describe Okun's law ? Give an

    Describe Okun's law? Give an illustration of how it works.

  • Q : MPC What relationship does the MPC bear

    What relationship does the MPC bear to the size of the multiplier? The MPS? What will the multiplier be when the MPS is 0, .4, .6, and 1