--%>
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 : Explain growth accounting. Economic

    Economic growth is measured by the rate of increase in national output, GDP. The output depends on inputs -labour, capital technology etc. the theories of economic growth bring out how and to what extent each input or factor contributes to the g

    		•
  • Q : What are the strength and weakness What

    What are the strength and weakness of using per capital national income? give explained answer for query

    		•
  • Q : Problem on law of diminishing marginal

    According to law of diminishing marginal utility, the longer that Lee and Chris kiss: (i) the less invested each will be in ongoing this relationship. (ii) The nearer they are to reaching their joined production possibilities frontier. (iii) The more

    		•
  • Q : Define Tax revenue Tax revenue : Tax

    Tax revenue: Tax revenue is the revenue which occurs on account of taxes levied by government. Taxes are of two kinds: direct taxes and indirect taxes. Direct taxes are such taxes levied instantly on the property and income of person’s income ta

    		•
  • Q : Surplus of the good Describe when there

    Describe when there will be a surplus of the good?

    		•
  • Q : Maximizing consumer utility The

    The consumer maximizes the utility whenever spending patterns causes: (i) Total outlays to increase each time prices are altered. (ii) Marginal utilities of each and every good consumed to be equivalent. (iii) Marginal utilities from the last cent spent on each and ev

    		•
  • Q : Problem on Imperfect information

    Imperfect information at times causes consumer’s attempts to maximize their contentment to fail since: (i) Prospects are imperfectly realized, and trial-and-error prototypes can lead to mistakes. (ii) Sellers might exploit asymmetric information

    		•
  • Q : Principles of macroeconomics Explain

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

    		•
  • Q : Paradox of Value-High values of

    The fact that most of the necessities for life like water are priced much lower than the frivolities like diamonds is addressed by the: (1) Utilitarian enigma. (2) Law of diminishing marginal utility. (3) Rational ignorance of hypothesis. (4) Paradox of the value. (5)

    		•
  • Q : Why is tax not a capital receipt

    Illustrate, why is tax not a capital receipt?

    		•