An economy is characterized by the following behavioral equations: C = 0.75% + 100-25r I=1226-30r G...

 

Transcribed Image Text:

An economy is characterized by the following behavioral equations: C = 0.75% + 100-25r I=1226-30r G = 600 T=520 IM = 0.15Y - 2700 + 280E EX=0.1Y* 250E π = 3% λ = 0.5 Y* is foreign output. E is the nominal exchange rate. NX=EX-IM 2. On one IS graph, show YD = Y - T E = 100E 100+1*-1 E = 10 Y*= 30,000 i* = 5.5% π² = 2% r = F + Aπ i=r+n² F = 2% equilibrium equation: Y=C+I+G+ NX i* is the foreign nominal interest rate. Inflation and interest rates are in percent units (e.g., enter 2, not 0.02). Suppose the expected nominal exchange rate (E) falls from 10 to 9.8. Suppose, further, that policymakers change the real interest rate to reverse the impact on the actual nominal exchange rate (E). That is, the changes in E and r cancel out so that E does not change. 1. Calculate the value of output (I) when both changes have occurred. a) the original equilibrium, b) the new equilibrium with change in E but no change in policy. c) the "final" equilibrium with changes in both E² and r. [Label the graph clearly and completely.] An economy is characterized by the following behavioral equations: C = 0.75% + 100-25r I=1226-30r G = 600 T=520 IM = 0.15Y - 2700 + 280E EX=0.1Y* 250E π = 3% λ = 0.5 Y* is foreign output. E is the nominal exchange rate. NX=EX-IM 2. On one IS graph, show YD = Y - T E = 100E 100+1*-1 E = 10 Y*= 30,000 i* = 5.5% π² = 2% r = F + Aπ i=r+n² F = 2% equilibrium equation: Y=C+I+G+ NX i* is the foreign nominal interest rate. Inflation and interest rates are in percent units (e.g., enter 2, not 0.02). Suppose the expected nominal exchange rate (E) falls from 10 to 9.8. Suppose, further, that policymakers change the real interest rate to reverse the impact on the actual nominal exchange rate (E). That is, the changes in E and r cancel out so that E does not change. 1. Calculate the value of output (I) when both changes have occurred. a) the original equilibrium, b) the new equilibrium with change in E but no change in policy. c) the "final" equilibrium with changes in both E² and r. [Label the graph clearly and completely.]

Answer rating: 100% (QA)

1 Calculate the new value of output Y when both the change in expected exchange rate Ee and change i... View the full answer