Consider the following model for a small open economy. Using this model, and rounding to 3 decimal places, please answer all questions to this CML Y = 750 – s – 1000i + 5e (1) IS Equation %3D i = 0.5 (1+ s) + 0.001Y – 0.0054 (2) LM Equation %3D i = ij = 0.05 (3) BP=0 locus Let foreign prices be fixed at P = 1 and the nominal exchange rate e be flexible. Question 1: Assuming that this is a classical economy with full flexible domestic prices and output is fixed at the full employment level Y=Yp= 2000. Also assume that there is no COVID (s-o) and the benchmark for nominal money supply is M-- s0. Solve for P

Consider the following model for a small open economy. Using this model, and rounding to 3 decimal places, please answer all questions to this CML Y = 750 – s – 1000i + 5e (1) IS Equation %3D i = 0.5 (1+ s) + 0.001Y – 0.0054 (2) LM Equation %3D i = ij = 0.05 (3) BP=0 locus Let foreign prices be fixed at P = 1 and the nominal exchange rate e be flexible. Question 1: Assuming that this is a classical economy with full flexible domestic prices and output is fixed at the full employment level Y=Yp= 2000. Also assume that there is no COVID (s-o) and the benchmark for nominal money supply is M-- s0. Solve for P

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 1CQ

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Assume a two-period small open economy model, where the national product is 50 in the current period, and 88 in the future period. The world real interest rate is 10% per period. The representative consumer has the following utility function: U(c,G,c’,G’) = ln(c+G) + ln(c’+G’). a) What are the optimal consumption plus government spending in the current and in the future period? What is the current account surplus? Show this in a diagram. b) Now, suppose that governments in the rest of the world impose a tax on lending to foreigners of 5%. Determine how this affects consumption plus government spending in the present and the future, and the current account surplus. Explain your results. c) Suppose that governments in the rest of the world still impose a tax on lending to foreigners of 5%. However, the national country found a huge reserve of oil and the current period income increased to 100. The Determine how this affects consumption plus government spending in the present and the…
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