Consider the following Dornbusch model under perfect foresight
e = 0.75y + 2.5 + 0.02(s - p)
p = 0.2(e - y)
md = p + 0.75y - 0.2r md = ms = 155
r = r* + se se = s
y = 10, r* = 12.5
(i) What is the equilibrium exchange rate and price of this system?
(ii) Set up the system on a spreadsheet.
(iii) Let the money supply fall from 155 to 152 in period 1. Plot the trajectory of the economy.