Part 1) We have the following information
Consumption spending: C = 50 + 0.75(Y – T) where T is taxes and Y is income
Investment: I = 200 – 20r where r is the interest rate
Net Exports: NX = 200 – 50e where e is the exchange rate
Money demand: (M/P) = Y – 40r
Government Spending: G = 200
Taxes: T = 200
Money supply: MS = 3,000
Price: P = 3
Interest rate = r = 4%
Deriving IS equation
Y = C + I + G + NX
Y= 50 + 0.75(Y – T) + 200 – 20r + 200 + 200 – 50e
Y = 650 + 0.75(Y – 200) – 20r – 50e
Y = 650 + 0.75Y – 150 – 20r – 50e
Y = 500 + 0.75Y – 20r – 50e
Y = 2000 – 80r – 200e (IS Equation)
Deriving LM equation
Y – 40r = (MS/P)
Y – 40r = (3000/3)
Y – 40r = 1000
Y = 1000 + 40r (LM Equation)
Equating IS and LM Equations
2000 – 80r – 200e = 1000 + 40r
It is given that r = 4
2000 – 320 – 200e = 1000 + 160
1680 – 200e = 1160
200e = 520
Equilibrium exchange rate = 2.6
NX = 200 – 50e
NX = 200 – (50 × 2.6)
NX = 200 – 130
Equilibrium Net Exports = 70
Y = 2000 – 80r – 200e
Y = 2000 – 320 – 520
Equilibrium Income = 1160
Part 2) Now it is given that the G has increased by 100. So, now the new G is 300.
Deriving IS equation
Y = C + I + G + NX
Y= 50 + 0.75(Y – T) + 200 – 20r + 300 + 200 – 50e
Y = 750 + 0.75(Y – 200) – 20r – 50e
Y = 750 + 0.75Y – 150 – 20r – 50e
Y = 600 + 0.75Y – 20r – 50e
Y = 2400 – 80r – 200e (IS Equation)
Deriving LM equation
Y – 40r = (MS/P)
Y – 40r = (3000/3)
Y – 40r = 1000
Y = 1000 + 40r (LM Equation)
Equating IS and LM Equations
2400 – 80r – 200e = 1000 + 40r
It is given that r = 4
2400 – 320 – 200e = 1000 + 160
2080 – 200e = 1160
200e = 920
Equilibrium exchange rate = 4.6
NX = 200 – 50e
NX = 200 – (50 × 4.6)
NX = 200 – 230
Equilibrium Net Exports = – 30
Y = 2400 – 80r – 200e
Y = 2400 – 320 – 920
Equilibrium Income = 1160
So, we can see that the increase in the government spending results in the appreciation of the currency leading to negative net exports and unchanged equilibrium income. In other words, the stimulation provided by the increased government spending has been completely negated by the decline in net exports due to the appreciation of the exchange rate.
A small open economy has the following relationships among its variables: C = 50+0.75 (Y-T) I=200-20r...
This assignment is based on Q2 of the chapter 13, Work it out. Only difference is that this assignment considers a fixed interest rate r* = 4. A small open economy has the following relationships among its variables: C = 50+0.75 (Y-T) I=200-20r NX = 200-50e M/P = Y-40r G= 200 T = 200 M=3.000 P= 3 r* = 4 Q1. Please calculate the following: Equilibrium Exchange Rate Net Export Income Q2. What will be the impact of increase in...
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Calculating IS, y=c+i+g+nx for: y=50+.75(y-200)+260-20r+200+200-50e Step by step please through algebra, Thanks
Question 3 Consider a small open economy. Assume that the following variables are exogenously set: G=1,000; T=800; L=2,500; K=3,000; A=1 and a=0.3. In addition, the consumption function is given by: C=50+0.65(Y-T). Investment is given by: 1=1,000-20r Finally, the world real interest rate is 6% and net exports are given by: NX=500-100€ (e=real exchange rate) Using the long-run model developed in chapter 5, compute the equilibrium values of the following variables. National saving equals Investment equals Trade balance equals The real...
4. Assume the following set of equations characterize a small open economy E R o nd (1) Y = 10,000 (2) Y=C+I+G + NX (3) C = 0.75(Y-T) D (4) I = 3.000 - 100r (5) NX = 500 - 500€ (6) CF = -100r Elo (7) CF = NXPO ato hone (8) G = 2.5500 TO FOOD (9) T = 1,800. (10)r=r* = 8.5% mbo TO is net exports, CF is net capital outflow, and is the real exchange...
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