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Consider a small open economy with floating exchange rates. The LM curve of this economy is...

Consider a small open economy with floating exchange rates. The LM curve of this economy is given as ??=20,000???200+(????),
and the IS curve is given as ??=500?20,000??+????,
where ????=600?300??. Suppose that ??=1,??=100, and the world interest rate (???) is 0.025.


1) Find out the equilibrium values of output (Y), exchange rate (e), and net export (NX) of this economy.   ANSWERS = Y = 400, NX = 400, e = 2/3.


2) Suppose the central bank increases the money supply to 200. Find out the new equilibrium values of output (Y), exchange rate (e), and net export (NX) of this economy.
(Assume that P is fixed at 1.) Is an expansionary monetary policy effective in this economy?   ANSWERS Y = 500, NX = 500, e = 1/3.

Please explain how we got the answers, thank you.

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Answer #1

ls,Ys Soo- 20 , 000 ( At ME 20 20, oco (0.02/) 200 + (ir 200) z Soo- 20, ooo(0,025) + (60D-300 С - iN Soo

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