Consider the following model economy which has a floating exchange rate: Y =a-br + ce + jG li ニと(R-P) T = dY – hM e =r-r' V ! e = 1 M =G-kY Where Y is real income, r is interest rate, e is exchange rate, G is government expenditure, M is money supply, is foreign interest rate. a, b, c, d, j, h, and k are parameters. i) Is it possible for a permanent cut in government spending to cause a temporary increase in output? ii) chece. Discuss some of the limitations of this model.

Consider the following model economy which has a floating exchange rate: Y =a-br + ce + jG li ニと(R-P) T = dY – hM e =r-r' V ! e = 1 M =G-kY Where Y is real income, r is interest rate, e is exchange rate, G is government expenditure, M is money supply, is foreign interest rate. a, b, c, d, j, h, and k are parameters. i) Is it possible for a permanent cut in government spending to cause a temporary increase in output? ii) chece. Discuss some of the limitations of this model.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter13: Open-economy Macroeconomics: Basic Concepts

Section: Chapter Questions

Problem 2PA

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