Question

1. Given a model:

C = 400+0.8YD                         M = 4800

t = 20%                                       Md/Pd = 300+0.3Y-9000i

TR = 200                                    є = EPd/Pf

I = 200 +0.2Y - 5000i                       

G = 400

NX= 500 - 0.2Y + 0.1Y*- 60є

1. Given price level Pd=2, Pf=4 and 1 unit of local currency can buy 5 units FX (E=5), the foreign income level is 3 times the domestic one, compose the IS and LM functions and calculate the equilibrium interest rate, output and trade balance? 10%
2. Following A.), if local currency experiences nominal appreciation of 10%, show the new output, interest rate and trade balance? How does it affect NX, explain? 5%
3. Show the results of A.) and B.) in an IS-LM diagram. 5%                                       

Answer 1

A Comider the given problem here the money market eam is given by it in md/pd = M/Pd => 300 +0.34_9,0001 - 4 pero - 0.34-9000i = 2100 swim in - the wx for is given by - I l NX = 500 – 0.24 + 0.14* 60€, EZEPA/P on NX = 500 -0.2y + d. 1 (34) - 60(as) = 5x2/4 = 2.5 NX = 350 +0.14 - (2) the goods market een is given by- & 4= c+ I + G + NX A > y = (400 +0.848) + (200 +0.24 - sodui) + 400 ++ (356 +0:14) - 4 = 1350+ 0.8 Yd + 0.24 - 50001 +0.14 -) (1-0-3) = 1350- soit 0.8 (1-0.2) 4 +0.8 X200 = 1350 - 50001 +0.644 + 160 => 0.064 = 1510 - 5000 -> 50001 + 0.564 = 1510 & (2) are the Is & LM curve So, here respectively

Now, simultaniously solning (1) eam output (4) & interest rate model. still unor will 4 (2) we get the ( in IS-LM So, the eam output & interest rate are given by y*= 11,809 & t = 0.1603. Sandbod B). Von let's assume the local currency appriciate by 10% = the new exchange rate, is nos E = 5x1.1 = 5.5., & = 1 EP d / Pf x = 5.5*2 the NX fix is given by soon to ssion CF2.75 allow ) NX - S60 - 0 2y + 0-4 * - ko = 500 -0.24 to 1 (34) - 60X2.75 NX = 335 +0.17 the new IS curre is given by - Y = c + I + G + NX -=[400+ 0.8 (Y-tYFTR)] + (200 + 0-24 - soroi) t 400 + (335+ 0-14) on = 1335 +0.8(10. 24 +0.8x200 +0.24 - Soovi toly = 0.74 = (1335 + 160] +0.644 - 5000 i = 0.06y + 5000 = 1495 So n ora - 42 Now, simultanioushy sloning (1) 4 (4) we get the ego y = 11,743 & ix = 0.1581.

So, initially the Trade Balance won given by - NX = 350+ 0.14 = 350+ 0.1 (11, 809) - NX = 15,309 7o. appriciation Now, nominal change the NX to NX = 335 + 0.14 = 335 + 0.1(11,743) = 15,093 < 15309 - NX 2 = 15,093. So, trade balance decreases or boost LMI comider the given fig. here the initial ISE LM are "is," & "LMI". So, the initial en is "E" the intersection of IS, & LM, So, the am ye 4 it are by "4,2 11,800"&" i;= d.1605" it- - - -- E2! Y2 = 1,743 YA = 11,809 shift Now, nominal appriciation of local currency the is came to 162. So, the new eam is where both the sun 14" & i decreases doslivi Nitrions not all Ez"