--%>
Assignment Help - homework help

Open-Economy Macroeconomics

Open-Economy Macroeconomics

 

Suppose the structure of an economy with a flexible exchange rates is represented by:

 

C = 200 + 0.85*(Y - T)                                                    L(r, Y) = 0.25*Y - 25*r

T = 200                                                                                                      MS/P = 2250

I = 1700 - 25*r

G = 1800

NX = 900 - 200*e                        where e represents the real exchange rate.

 

(a)    Explain intuitively why net exports (NX) depend negatively on the real exchange rate.

 

 

 

(b)   Derive the equation for the IS curve.

[HINT: Recall that the equilibrium in the goods market for an open economy is given

by Y = C + I + G + NX; then solve for Y as a function of r and e]

 

 

(c)    Derive the equation for the LM curve.

[HINT: Recall that the equilibrium in the financial market is given by MS/P = L(r,Y); then solve for Y as a function of r]

 

 

(d)   When there is perfect capital mobility, it is possible to assume that the equilibrium in international capital markets implies that interest rates here and abroad must be equal.  That is,

 

r = rf

 

Otherwise, capital would move towards more profitable markets.  Assume that this economy cannot control the foreign interest rate (rf).  That is, the interest rate is exogenously determined (i.e., determined outside the model).  Notice that in this case, the equilibrium in the financial market (the LM) is enough to determine equilibrium Y.  Calculate equilibrium Y if rf = 2.

 

 

(e)    Calculate equilibrium C, I and NX. [HINT: Knowing Y and r, it is possible to pin down C and I.  Also, with Y, C, I and G and knowing that Y = C + I + G + NX, can pin down NX]

 

 

(f)    What is the value of e that guarantees equilibrium in the goods market? Now, we will study the impact of fiscal and monetary policy for both a flexible exchange rate regime (or "free floating") and a fixed exchange rate regime (or "peg").

 

Flexible Exchange Rates

 

(g)   Suppose G increases by 90.  Assuming flexible exchange rates, show graphically what happens after a expansionary fiscal policy.  Does equilibrium Y output increase?  Why?  Calculate the new equilibrium output.

 

 

   Related Questions in Macroeconomics

  • Q : Zero primary deficits What points out

    What points out zero primary deficits? Answer: Zero primary deficits signify that the government has to resort to borrowings simply to make interest payments.

    		•
  • Q : Fiscal and Monetary policies How can

    How can governments seek to control their national economies through fiscal and monetary policies?

    		•
  • Q : Explain model of economy growth. The

    The origin of economic growth can be traced back to Adam Smith's Wealth of Nations. InSmith's view, economic growth of a nation depends on the 'division of labour' and specialization, and is limited by the limits of div

    		•
  • Q : Why value of MPC is not greater than one

    Why the value of MPC is not greater than 1? Answer: This is because change in consumption can never be more than change in income.

    		•
  • Q : Control of Inflation Economists agree

    Economists agree that inflation beyond a moderate rate is undesirable as it can often prove disastrous and therefore, it must be kept under control. Economists agree also that an appropriate mix of fiscal and monetary policies can be helpful in controlling inflation.

    		•
  • Q : Meaning of Cash Reserve Ratio or CRR

    Meaning of Cash Reserve Ratio (CRR): It is the percentage of net or total deposits of commercial bank that are maintained by RBI.

    		•
  • Q : Collecting cost-Revenue data from

    Collect cost, revenue data or other relevant data from the airbus industry and describe how you would modify the data to make it relevant to decisions a manager should make.

    		•
  • Q : Implications of fiscal deficit

    Implications of fiscal deficit: (A) High fiscal deficit entails a big amount of borrowings in which the government takes more loans to pay back it. It raises the liability of government.

    Q : Market imperfection associated with

    Question: This assignment in Economics, deals with macro-economics. An essay on Market imperfection associated with negative externalities. According to Economics, perfect markets would require an "invisible hand" to allocate all the resources to be a

    		•
  • Q : Is sale of scooter is national income

    Describe whether the sale of old scooter is comprised in national income?

    		•