Problem Set 5 Due Date: December 08/09 at the Beginning of Section You may type or hand write your answers, as long as they are legible. Most students find that it is easier to hand draw the graphs. Also, each person must hand in their own problem set but you are encouraged to discuss problem sets with others. Please hand in a hard paper copy, with your full name and UMID written legibly in the upper right-hand corner of the front page. 1. Arborland is a small open economy with a floating exchange rate. Its local currency is Arbor dollars. Suppose that consumer confidence, Co, increases by 50, and that the marginal propensity to consume is 0.90. a. Derive the government spending, tax, and "consumer confidence" multipliers. Recall the consumption function, C = 60' T) = C0 + a(Y 7'), and you will want to use the equilibrium condition in the Keynesian cross Y = PE. b. Using the Mundell Fleming 3-panel diagram, illustrate what happens in each panel for Arborland. Label as many numerical values as possible. For all graphs, label the initial equilibrium as point A, the final equilibrium as point C, and you will use point B to illustrate the impact of the exogenous change, holding e constant. c. In your diagram from the previous part, point B to point C illustrates a change in the exchange rate. Provide economic intuition for the change of the exchange rate. Determine if Arborland goods are relatively cheaper or more expensive