2. A small open economy is described by the following equations: C = 60 +.75(Y - T) I= 150 - 20r NX 150 – 50e %3D MP = Y- 40r G= 1500 M= 2000 P = 2 R* = 5 Assume a balanced budget. a. Derive and graph the IS* and LM* curves. b. Calculate the equilibrium exchange rate, level of income, and net exports. c. Assume a floating exchange rate. Calculate what happens to the exchange rate, the level of income, and net exports if the government increases its spending by 50. Use a graph to explain what you find.

2. A small open economy is described by the following equations: C = 60 +.75(Y - T) I= 150 - 20r NX 150 – 50e %3D MP = Y- 40r G= 1500 M= 2000 P = 2 R* = 5 Assume a balanced budget. a. Derive and graph the IS* and LM* curves. b. Calculate the equilibrium exchange rate, level of income, and net exports. c. Assume a floating exchange rate. Calculate what happens to the exchange rate, the level of income, and net exports if the government increases its spending by 50. Use a graph to explain what you find.

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...

See similar textbooks

Similar questions

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1 of Germanys GDP; private savings is 20 of GDP; and physical investment is 18 of GDP. Based on the national saving and investment identity, what is the current account balance? If the government budget surplus falls to zero, how will this affect the current account balance?
1. Consider an economy described by the following equations;Y = C + I + G +NXY = 5,000G = 1,000T = 1,000C = 250 + 0.75(Y–T)I = 1,000 – 50rNX = 500 – 500εr = r*=5%a) In this economy, solve for national saving, investment, trade balance and the equilibriumexchange rate.b) Suppose now that G rises to 1,200. Solve for national saving, investment, trade balance andthe equilibrium exchange rate and trade balance.
a Figure 1 shows the exogenous world interest rate (r*) determines the level of investment (I) and the difference between saving (S) and investment determines net capital outflow and net exports (NX) for a small open economy. What would happen to I, NX and S if: i. The government of this small open economy uses expansionary fiscal policy. ii. The government of other countries (abroad) uses contractionary fiscal policy. b Suppose the price of a cup of tea is Rs.50 in Pakistan and $2 in USA, the value of nominal exchange rate is $0.006364 per PKR. Calculate the value of real exchange rate (ε) and interprete its meaning. Also, discuss the relationship between net exports (NX) and real exchange rate. c Briefly explain the theory of purchasing power parity (PPP) with the help of example.
You have the following annual data for the New Zealand economy ($bn): GDP (Y) = 190 Gross National Disposable Income (Yd) = 183 Net exports of goods and services (NX) = 5 Private Consumption (C) = 112 Government consumption (G) = 38 Based on this data, complete the following paragraph (enter numbers only). Investment (I) is equal to $____bn. The current account (surplus or deficit?) is equal to $_____bn. The capital account part of the balance of payments (which for the purposes of this question includes both capital and financial accounts) therefore shows a ____ of $_____bn. National savings is equal to $______bn.
Answer These Three Sub Parts i) In an open economy, Y = C + I + G + NX. Using symbols from this identity, write anexpression that defines national saving, S, in an open economy.S = _________________________ . ii) True or False? In an open economy, the following is always true: S = I + NCO, where I isinvestment spending and NCO is net capital outflow. iii) In an open economy, a country’s net capital outflow is:a.) the value of domestic assets purchased by foreigners minus the value of foreign assetspurchased by domestic residentsb.) the value of foreign assets purchased by domestic residents minus the value of domesticassets purchased by foreigners.
Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of 100 billion, total domestic savings of 1,500 billion, and total domestic physical capital investment of 1,600 billion. According to the national saving and Investment Identity, what will be the current account balance? What will be the current account balance if Investment rises by 50 billion, while the budget deficit and national savings remain the same?
Explain the relationship between a current account deficit or surplus and the flow of funds.