Question $1(25$ marks total$)$

Suppose country A has the following macroeconomic variables:

$Y=500$;$C=60+0\mathrm{.}8(Y-T)$;$I=40-5r$

$G=50+0\mathrm{.}9T$;$T=0\mathrm{.}1Y$;$Nx=20-50E$

where Y$,$ C$,$ I, G$,$ T$,$ NX stand for nominal GDP$,$ consumption, investment, government expenditure, tax, and net exports, respectively. E is the real exchange rate between this country and its major trade partner B $,$ and $r=2$ is the real interest rate in this country.

a$)$ Find C$,$ I, G$,$ T$,$ and national savings $($S$)$ of country A$.$

$(5$ marks$)$

b$)$ Find net capital outflow $($NCO$),$ NX$,$ and E of country A$.$ Explain what this real exchange change E means.

$(4$ marks$)$

c$)$ Suppose that a typical basket of goods in country costs $650$ units of the currency of country $A,$$${?}_A,$ and $500$ units of the currency of country $B,$$${?}_B.$ Find the nominal exchange rate between the two currencies, e$.$

$(2$ marks$)$

d$)$ Does the purchasing power parity hold in this case? Provide at least two possible reasons for why or why not.

$(5$ marks$)$

e$)$ Suppose the real GDP and the velocity of money in the two countries and their real exchange rate do not change, the central bank in country A increases its money supply by $10\%,$ and the central bank in country B increases its money supply by $15\%.$ What would be the new nominal exchange rate between the two countries?

$(4$ marks$)$

f$)$ Suppose a firm in country A purchased some equipment in country B to be used in its affiliate in country B$.$ Explain how this transaction impacts country A$\text{'}$s net exports and net capital outflow in the following two cases: $($i$)$ The firm pays with the currency of A$,($ii$)$ The firm pays with the currency of country B$.$

$(5$ marks$)$