1. Assuming that the economy is in equilibrium, find the value of the interest rate.2. Going from the equilibrium found in Question (1), assuming fixed nominal exchangerates, what is the effect on domestic output if the foreign interest rate increases by 0.05?(a) What is the size of the nominal money supply in the new short run equilibrium?3. Going from the equilibrium found in Question (1), assuming flexible exchange rates,what is the effect on domestic output if the foreign interest rate increases by 0.05?(a) What is the value of the real exchange rate in the new equilibrium? Consider the following small open economy:с=200+ 0.69YI=80 - 1,000rG =20NX =850.09Yee =90M =115YL = 0.5Y - 200rY = 300C is consumption spending, I is investment spending, r is the interest rate, G is govern-ment spending, NX is net exports, e is the nominal exchange rate, M is money supply, YL isdemand for money, and Y is long-run output.In this economy, the interest rate does not deviate from the foreign interest rate.The price level is fixed and set to one.Note that, in this problem, a decrease in e is synonymous with a depreciation of thenominal exchange rate.

A small open economy contracted to SOE, is an economy that takes part in global exchange, however,…

1. Assuming that the economy is in equilibrium, find the value of the interest rate. 2. Going from the equilibrium found in Question (1), assuming fixed nominal exchange rates, what is the effect on domestic output if the foreign interest rate increases by 0.05? (a) What is the size of the nominal money supply in the new short run equilibrium? 3. Going from the equilibrium found in Question (1), assuming flexible exchange rates, what is the effect on domestic output if the foreign interest rate increases by 0.05?

1. Assuming that the economy is in equilibrium, find the value of the interest rate. 2. Going from the equilibrium found in Question (1), assuming fixed nominal exchange rates, what is the effect on domestic output if the foreign interest rate increases by 0.05? (a) What is the size of the nominal money supply in the new short run equilibrium? 3. Going from the equilibrium found in Question (1), assuming flexible exchange rates, what is the effect on domestic output if the foreign interest rate increases by 0.05?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter23: The International Trade And Capital Flows

Section: Chapter Questions

Problem 46P: Imagine that the economy of Germany finds itself in the following situation: the government budget...

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