Suppose that the goods market in an open economy is characterized by the following equations:
C = 400 + 0.5 (Y - T) X = 100 +0.1 Y* +100 E
I = 700 - 4000 i + 0.2 Y EQ = 0.1 Y - 50 E
G = 200 E = 2.0
T = 200 Y* = 1000
(C, I, G, T, X and Q are all measured in billions of dollars)
a. Assuming that the interest rate is 10% (0.1), calculate the equilibrium level of GDP and net exports;
b. Supposethat the equilibrium level of output as calculated under section (a) above falls short of the full employment GDP by 50. How much should the government devaluate the domestic currency in order to achieve full employment? Calculate the percentage rate of exchange rate devaluation.