Question 2 (25 points) Topic 7 Suppose a small open economy can be described by the following set of equations: Long-run output: YFE = 48000 Consumption: C = 11250 + 0.75(Y T) 2000r Investment: I = 13500 1500r Net exports: NX(8) = 9000 10008, where 8 = the real FC/DC exchange rate Taxes: T = 15000 Government spending: G = 12000 Money supply: MS = 25200 Real money demand: L(r + 1:6, Y) = 0.2Y 200(r + are) Expected ination rate: me = 0% Note: Real interest rates, r, is expressed in percentage points. For example, if r = 5, then r = 5%. Keep your answer to at least 4 decimal points if necessary. a) Derive the net foreign investment function in terms of the exogenous variables. (2 points) b) Find the longrun equilibrium levels of real exchange rate, net exports and price if the world interest rate is 6%. (5 points) The economy is initially in its long-run equilibrium as described in part (b). The outbreak of COIVD-19 leads to economic uncertainty; as a result, the world demand for (loanable) funds drops. In addition, studies show that this change in the world demand for funds will cause the world interest rate to change by 3 percentage points. c) Redo part 0)). (6 points) (1) With the aid of a set of diagrams for the long-run classical model of a small open economy, explain in words your ndings in parts (b) and (c). (6 points) e) Suppose the government wants to balance the trade account via a change in government spending; and at the same time, the central bank wants to achieve price stability (i.e., keeping the price level xed at the initial level) Via a change in money supply, nd the level of government spending and money supply that will achieve these goals simultaneously. (6 points)