1. The following equations characterize the goods market in an open economy:
C = 600 + 0.8YD I = 400 - 3000i + 0.25Y
G = 505 X = 200 + 0.1Y* + 150 e
T = 450 Q = 0.2Y - 80 e e = 1.5 Y* = 1500
a) Find the equilibrium output if i = 4%.
b) If the interest rate increases to5%, what happens to output and net exports? Show your complete calculations.
2. Using the basic IS-LM model (graph) in the open economy, illustrate and analyze the effects of lower taxes on the equilibrium output (Y), nominal interest rate (i) and the nominal exchange rate (E). Is the effect of lower taxes on output smaller or greater than that in a closed economy? Why?
3. It is believed that fiscal policy is more effective under a fixed exchange rate than a flexible exchange rate. Using the IS-LM model, illustrate and explain this differential impact for a contractionary fiscal policy.
4. Depict the equilibrium situation in the labour market using the Wage-Setting and Price-Setting relations and carefully label the graph. Use this model to illustrate and explain what happens to the natural rate of unemployment and real wages whena) Reduced competition increases the price mark-up.
b) Unemployed people's claims for Employment Insurance benefits are more closely monitored.
5. Using the AD-AS model, show the effects of each of the following shocks on output (Y) and the price level (P) in both the short-run and the medium-run.Assume the economy is originally at the natural level of output (Yn).a) An increase in investor confidence
b) A decrease in government spending