Note: Students need to show all working. Use 3 decimal places. Question 1. (10 marks) Consider the following model of a small open macroeconomy: Production and Labour Market: Y =65N - N/2 (1) Production function N=60-W/P (2) Labour demand N. =(0.5)W/P (3) Labour supply N.=N, EN (4) Labour market equilibrium Goods Market: C=159 +0.75Y) (5) Consumption function I = 75+0.2Y - 200i (6) Investment function Government expenditure G=175 (7) Y,=Y-T (8) Disposable income T =Y/3 (9) NX =100 -0.1Y+e/P (10) Tax function Net export function Goods market equilibrium Y =C+I+G+NX (11) Money Market: L = 100+ 0.2Y - 200i (12) Real money demand M/P (13) Money supply L = M/P (14) Money market equilibrium Balance of Payments: i = ip = 0.05 (15) BP = 0 locus d) (2 marks) Suppose that the price level is fixed at P = = 1 in the short run, but both P and the nominal wage Ware flexible in the long run. The nominal money supply reduced to M = M = 275 but the exchange rate e is flexible, what is the equilibrium value of Y" in the short run and long run? e) (2 marks) Supposing that the price level and exchange rate are fixed, and the government decreases taxes. Illustrate the effects of this policy change using an appropriate diagram. Explain briefly. Note: Students need to show all working. Use 3 decimal places. Question 1. (10 marks) Consider the following model of a small open macroeconomy: Production and Labour Market: Y =65N - N/2 (1) Production function N=60-W/P (2) Labour demand N. =(0.5)W/P (3) Labour supply N.=N, EN (4) Labour market equilibrium Goods Market: C=159 +0.75Y) (5) Consumption function I = 75+0.2Y - 200i (6) Investment function Government expenditure G=175 (7) Y,=Y-T (8) Disposable income T =Y/3 (9) NX =100 -0.1Y+e/P (10) Tax function Net export function Goods market equilibrium Y =C+I+G+NX (11) Money Market: L = 100+ 0.2Y - 200i (12) Real money demand M/P (13) Money supply L = M/P (14) Money market equilibrium Balance of Payments: i = ip = 0.05 (15) BP = 0 locus d) (2 marks) Suppose that the price level is fixed at P = = 1 in the short run, but both P and the nominal wage Ware flexible in the long run. The nominal money supply reduced to M = M = 275 but the exchange rate e is flexible, what is the equilibrium value of Y" in the short run and long run? e) (2 marks) Supposing that the price level and exchange rate are fixed, and the government decreases taxes. Illustrate the effects of this policy change using an appropriate diagram. Explain briefly