This question uses a numerical example to understand the connections between the goods, money, and foreignexchange (FX) markets. Use the information below to answer the following questions.Goods Market Money Market FX Market C = 300 + 0.8(Y - T) T = 400 M = 1,050 E* = 2I = 400 - 2,000i (???????? = 0) L = 0.5Y - 5,000i i* =8%G = 500 P = 2TB = 400 (1 - 2/E) - 0.2 (Y-100)

a. Find the MPC, MPCF, MPCH, and MPS for this economy

b. Using the uncovered interest parity condition, solve for the exchange rate (E) as a function of thehome interest rate (i ).

c. Write out an expression for the IS and LM curves. You should have output (Y) expressed as a functionof the interest rate (i ).

d. Find the equilibrium (home) interest rate, i, and the equilibrium (home) output, Y. Calculateconsumption, investment, trade balance, and exchange rate at the economy?s equilibrium.

e. Suppose the government wants to achieve a balanced budget through adjusting taxes. What level oftaxes would balance the budget? Repeat (a) and (d) using this new level of taxes, assuming a floatingexchange rate regime.

f. Using the IS-LM-FX model, illustrate how this change in taxes affects the economy. Comparing thenumerical values you found in (e) with those from (d), are your answers consistent with the diagram?

ECO471A Austin College, Spring 2016 Assignment 7 Part I. Essay 1. Explain why if households engage in consumption smoothing, then tax cuts have a smaller effect on output. 2. In 2001, President George W. Bush and Federal Reserve Chairman Alan Greenspan were both concerned about a sluggish U.S. economy. They also were concerned about the large U.S. current account deficit. To help stimulate the economy, President Bush proposed a tax cut, whereas the Fed had been increasing U.S. money supply. Compare the effects of these two policies in terms of their implications for the current account. If policy makers are concerned about the current account deficit, discuss whether stimulatory fiscal policy or monetary policy makes more sense in this case. Then, reconsider similar issues for 2009- 2010, when the economy was in a deep slump, the Fed had taken interest rates to zero, and the Obama administration was arguing for larger fiscal stimulus. Part II. IS-LM-FX Model - Quantitative problem This question uses a numerical example to understand the connections between the goods, money, and foreign exchange (FX) markets. Use the information below to answer the following questions. Goods Market Money Market FX Market C = 300 + 0.8(Y - T) T = 400 M = 1,050 E* = 2 I = 400 - 2,000i ( = 0) L = 0.5Y - 5,000i i* =8% G = 500 P=2 TB = 400 (1 - 2/E) - 0.2 (Y-100) a. Find the MPC, MPCF, MPCH, and MPS for this economy b. Using the uncovered interest parity condition, solve for the exchange rate (E) as a function of the home interest rate (i ). c. Write out an expression for the IS and LM curves. You should have output (Y) expressed as a function of the interest rate (i ). d. Find the equilibrium (home) interest rate, i, and the equilibrium (home) output, Y. Calculate consumption, investment, trade balance, and exchange rate at the economy's equilibrium. f. Using the IS-LM-FX model, illustrate how this change in taxes affects the economy. Comparing the numerical values you found in (e) with those from (d), are your answers consistent with the diagram? 1 Suppose the government wants to achieve a balanced budget through adjusting taxes. What level of taxes would balance the budget? Repeat (a) and (d) using this new level of taxes, assuming a floating exchange rate regime. Page e. Part III. IS-LM-FX Model - Graphing and explain For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock. For each case, state the effect of the shock (increase, decrease, no change, or ambiguous) on the following variables: Y, i, E, C, I, TB. Assume the government responds by using monetary policy to stabilize output. a. Lump-sum taxes increase. b. Foreign income increases. c. Investors expect an appreciation of the home currency. Page 2 d. The money supply decreases