Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r – 200 + 2(M/P), while the IS curve is Y = 400 + 3G – 2T + 3NX – 200r. The function for NX is NX = 200 – 100e, where e is the exchange rate. The price level (P) is fixed at 1.0. The international interest rate is r*= 2.5 percent. a. Using the LM curve, find the equilibrium level of Y in the small open economy, if M =100. b. Given this value of Y, if G = 100 and T = 100, what must be the equilibrium value of NX? c. If this value of NX is to be achieved, what must be the equilibrium exchange rate, e?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
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Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
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Chapter6: Managing In The Global Economy
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Assume that the LM curve for a small open economy with a floating exchange rate is given
by Y = 200r – 200 + 2(M/P), while the IS curve is Y = 400 + 3G – 2T + 3NX – 200r. The function for NX is NX = 200 – 100e, where e is the exchange rate. The price level (P) is fixed
at 1.0. The international interest rate is r*= 2.5 percent.
a. Using the LM curve, find the equilibrium level of Y in the small open economy, if M =100.
b. Given this value of Y, if G = 100 and T = 100, what must be the equilibrium value of NX?
c. If this value of NX is to be achieved, what must be the equilibrium exchange rate, e?

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