1) Consider the following information for a small open economy. Y = 22,500 C = 0.75(Y – T) I= 1500-10r T = 500 G = 4000 NX = 800 - 5ɛ r =r* = 5 a) Set up the equilibrium condition for the small open economy and find the equilibrium real exchange rate b) Given the equilibrium real exchange rate from part a, is the government running a trade surplus or deficit? c) Given the equilibrium real exchange rate from part a, find the nominal exchange rate if the domestic price of the basket is $200 and the foreign price of the basket is 250£.

1) Consider the following information for a small open economy. Y = 22,500 C = 0.75(Y – T) I= 1500-10r T = 500 G = 4000 NX = 800 - 5ɛ r =r* = 5 a) Set up the equilibrium condition for the small open economy and find the equilibrium real exchange rate b) Given the equilibrium real exchange rate from part a, is the government running a trade surplus or deficit? c) Given the equilibrium real exchange rate from part a, find the nominal exchange rate if the domestic price of the basket is $200 and the foreign price of the basket is 250£.

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter19: International Finance And The Foreign Exchange Market

Section: Chapter Questions

Problem 5CQ

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