--%>
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 : 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 : Econ question No need apa format no

    No need apa format no need introduction and conclusion Only answer question being ask, thanks

    		•
  • Q : Threats of SWOT analysis Threats of

    Threats of SWOT analysis: • Possible threat from other banks and other financial institutions • There is always a possible threat of market fluctuations. By this we me

    		•
  • Q : Value of MPC when MPS is zero Determine

    Determine the value of MPC whenever MPS is zero? Answer: Whenever MPS = 0, MPC = 1 – 0 = 1.

    		•
  • Q : What is multiplier Multiplier : The

    Multiplier: The Multiplier is the ratio of change in income by the change in investment. Multiplier (k) = ΔY/ΔI

    		•
  • Q : What points out revenue deficit What

    What points out revenue deficit? Answer: Revenue deficits are stated as the surplus of revenue receipts. Revenue Deficit = Revenue Expenditure - Revenue Recei

    		•
  • Q : Formula for Fiscal deficit Fiscal

    Fiscal deficit: Fiscal deficit is stated as the surplus of total expenditure over total receipts, apart from borrowings. Fiscal deficit = Total expenditure (Rev. Exp. + Cap. Exp.) – Total Receipts

  • Q : Problem on tax system In the figure

    In the figure shown below, line T0 depicts a tax system which is: (1) Progressive. (2) Regressive. (3) Proportional. (4) Unbiased. (5) Recessive. 386</span></p> </div> <!-- /comment-box --> </li> </td> </tr><tr> <td> <li> <div class=

    Q : Problem on slope of demand curve The

    The demand curve for DVD games is a straight line, therefore its slope: (1) Is constant, although price elasticity of demand drops/falls as output increases. (2) Price elasticity are both stable. (3) Is constant, although price elasticity of demand increases as the pr

    		•
  • Q : Demand-pull inflation What is

    What is "demand-pull" inflation?

    		•