Can you please explain the thought process of Question 29.

1/ What causes them to either increase or decrease?

2/ How are domestic currency and interest related?

Question 27 - Question 31: Use the income-expenditure model to answer the questions. Suppose a small open economy with fixed prices can be described by the following equations: Consumption: C = 500 + 0.8YD; Government spending: G = 400 Planned investment: IPlanned = 340 - 500i Taxes: T =0.14Y - 70 Exports: X = 820 - 40EFC/DC Transfers: TR = 280 - 0.06Y Imports: IM = 265 + 0.14Y + 10EFC/DC NOTE: YD = disposable income. In addition, unless otherwise stated, interest rate, i, is held constant at 0.05 (5%) and exchange rate, EFC/DC, is held constant at 2 (FC per DC). For each question, keep your answer to 2 decimal places if necessary and be sure to show your work. Question 27 Find the equilibrium level of output. AEPlanned = 1950 + 0. 5Y Y = 1950 + 0. 5Y = Y* = 3900 Output: 3900 Question 28 - Question 31 The economy is initially in its long-run equilibrium as shown in Question 27. Suppose both government spending and lump-sum transfer rise by 50. Question 28 When the economy reaches its new equilibrium, find the change in output level and the budget balance. AAEo = 90 AY* = 90 x 1 180 1-0.5 New AEPlanned = 2040 + 0.5Y Y* = 4080 = AY* = 4080 - 3900 = 180 AGBB = 64 Change in output: Change in budget balance: 180 or T by 180 - 64 or by 64Question 29 Suppose the changes in fiscal policy causes the interest rate to change by 0.5 percentage points and the exchange rate to change by 0.15 FC per DC. Compare to the initial equilibrium as shown in Question 27, find the change in equilibrium level of output. Hint: You need to determine whether interest rate increases or decreases, and whether DC appreciates or depreciates as a result of the changes in fiscal policy. AAEo = 80 AY* = 80 x 1 160 New AEPlanned = 2030 + 0.5Y 1-0.5 Y* = 4060 = AY* = 4060 - 3900 = 160 Change in output: 160 or 1 by 160