In this problem set, we analyse the trade-offs for monetary policy in the open economy. The model economy is described by the following relationships (same notation as in lecture):

1. Goods market (IS curve):

Consumption demand: C = 100+ 0.5(Y - T)

Investment demand: I = 40+0.2Y 10002

Public sector: G 20, T20

Trade balance: NX = 0.1Y-0.1Y+500ln(S)

2. Financial markets (LM curve):

The central bank conducts policy by changing the interest rate i in the policy rule.

Monetary policy rule: i = i +0.0001 (Y - Y)

Potential income: 300

3. International capital market:

Uncovered interest parity: In(S) - In(S) = i* -i

Fixed expectations about the long-run exchange rate: S = 1

World economy: Y 200, i* = 0.05

2. Calculate the equilibrium values of output Y, the interest rate i and the exchange rate S for the case of ii= 0.05.