Question

4. This question explores IS and FX equilibria in a numerical example. a. The consumption function is C =1.5 +0.75(Y -T). What is the marginal propensity to consume, MPC? What is the marginal propensity to save, MPS? b. The trade balance is TB = 5(1 –[1/E]) - 0.25(Y – 8). What is the marginal propensity to consume foreign goods, MPCF,? What is the marginal propensity to consume home goods, MPCH,? c. The investment function is I = 2-10i. What is the investment when the interest rate i is equal to 0.10 = 10%? d. Assume government spending is G. Add up the four components of demand and write down the expression for D. e. Assume forex market equilibrium is given by i = ([1/E]) – 1) +0.10. Where the two Foreign return terms on the right are expected depreciation and the Foreign interest rate. What is the foreign interest rate? What is the expected future exchange rate?

Answer 1

Griven in This question numerical Prample. explory Is and Fx equilibria ina Houin a) consider the given Problem, heor the conyumphion function is given by "C=1.576.75*(y) , so hoor Mpe be the additionnel consumphon if "y" incorecte by 1 unit, =) dc/dy-0.75 , So MPC0-15", and "MPS -1,- Mpe=025". Hext:- (6) 80, leor "T8 - 5*(1-(1/2)) -0-as* (7-8).80 heve MPCF is the additional consumption when y increases by 1 onit, mathematically, MPCF= (-) (di/dy),=> MPCF -0.25 (c) let's assume that the "Investment function" is given by "1=2-10*1", so if i=10.1=0.1' then 1= 2-0.1*10=2-1=1 so the investment is 1:1 so, there are a component iso the "expen dition is given by "D= C++G+TB". function" (d) -

D=1.57 0.75* (Y-1) +(2-10*i) +G+ 5*(1-(VE)) - 0.25*CY-8) => D= 1.5+0.75* y -0.75 *y -0.75*T+24o* i+6+5-5*(1/E) -o'agky+ 0.as*&. => 02 (1.5-6.75*+a+Gi+5 -5* (1/E) +0.25*8] +0.75*y -10*i-oasty. =$0 = [05-0.75 +G - * (VE)] + 05*y-20*1. = =