Problem
This question explores IS and FX equilibria in a numerical example.
a. The consumption function is C = 1.5 + 0.75(Y - T ). What is the marginal propensity to consume MPC? What is the marginal propensity to save MPS?
b. The trade balance is TB = 5(1-[1/E]) - 0.25(Y - 8). What is the marginal propensity to consume foreign goods MPCF? What is the marginal propensity to consume home goods MPCH?
c. The investment function is I = 2 - 10i. What is investment when the interest rate i is equal to 0.10 = 10%?
d. Assume government spending is G. Add up the four components of demand and write down the expression for D.
e. Assume forex market equilibrium is given by i = ([1/E] -1) + 0.10, where the two foreign return terms on the right are expected depreciation and the foreign interest rate. What is the foreign interest rate? What is the expected future exchange rate?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.