Use the following macro model from Note Set 15 for the analysis of the BREXIT shock described below:
IS: Y=C+I+G
C= 200+.75(Y-T)
I = 200 - 10r
T=100
G=100
Y*=1200
LM: M/P=Y-50r
M=575; P=1
Assume that the British economy is at its trend level of output Y*=1,200, prior to the BREXIT shock.
Suppose that the British economy, following BREXIT, experiences a big decline in domestic investment as multinationals relocate their production facilities out of the UK to the European mainland.
Specifically British domestic investment, which was I = 200 - 10r, falls by 50 units to IBREXIT = 200-50-10r = 150-10r
a. Use the above IS-LM model to show the changes in Y, r and I from before the BREXIT shock when I=200-10r and Y=Y*=1200, to after the BREXIT shock when IBREXIT = 150-10r.
You must also draw an IS-LM graph and use it to describe in word what is happening.
b. Over time the price level will adjust since there is a negative GDP gap and since the inflation equation π = α (Y - Y*)/Y* says inflation (deflation) will occur as long as the gap, Y-Y*, is positive (negative). Show what happens in the long run as prices adjust.
You must also draw an IS-LM graph and use it to describe in word what is happening.
Attachment:- GlobalEconomicsNote.rar