The following equations describe a small open-economy: C 100.5Y I = 160-50r NX 80 0.1Y-e e...

 

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The following equations describe a small open-economy: C 100.5Y I = 160-50r NX 80 0.1Y-e e 50 0.1Y+ (r1*) G = 10 where C is consumption, I is investment, Y is domestic output, r is the domestic real interest rate, NX is net exports, e is the real exchange rate, G is government spending and r* is the foreign real interest rate. (a) Suppose that is fairly small, = 5, full employment output is Y = 400 and r* = 0.1. What is the equilibrium value of the domestic interest rate, r? (3 marks) (b) Consider instead that is fairly large, = 1000, where again Y = 400 and r* = 0.1. What is the equilibrium value of the domestic interest rate? (2 marks) (c) What happens to r as increases? Does r converge to r* as approaches infinity? What type of small open economy model does this resemble? (3 marks) (d) Now consider the case where r = 1*, so that the domestic goods market does not determine the domestic interest rate. Further, let the real money supply M/P = 402.5 and money demand be L (Y, r)=Y-75r. What are the equilibrium values of Y, P and e? (3 marks) The following equations describe a small open-economy: C 100.5Y I = 160-50r NX 80 0.1Y-e e 50 0.1Y+ (r1*) G = 10 where C is consumption, I is investment, Y is domestic output, r is the domestic real interest rate, NX is net exports, e is the real exchange rate, G is government spending and r* is the foreign real interest rate. (a) Suppose that is fairly small, = 5, full employment output is Y = 400 and r* = 0.1. What is the equilibrium value of the domestic interest rate, r? (3 marks) (b) Consider instead that is fairly large, = 1000, where again Y = 400 and r* = 0.1. What is the equilibrium value of the domestic interest rate? (2 marks) (c) What happens to r as increases? Does r converge to r* as approaches infinity? What type of small open economy model does this resemble? (3 marks) (d) Now consider the case where r = 1*, so that the domestic goods market does not determine the domestic interest rate. Further, let the real money supply M/P = 402.5 and money demand be L (Y, r)=Y-75r. What are the equilibrium values of Y, P and e? (3 marks)