Consider the following small open economy: Cd = 200 + 0.69Y 1d = 80 – 1000r G = 20 NX = 85 -0.09Y - e a) Suppose that the economy has a fixed exchange rate: ē = 80 Derive the open economy IS curve with r on the left hand side and Y on the right hand side for the fixed exchange rate economy. b) Solve for the level of output in a long run equilibrium if r=0.05. c) Now suppose that the world interest rate is given by r=0.1 and the economy has a floating exchange rate. What must the nominal exchange rate, e, be in a long run general equilibrium? Assume the level of output in part d) Use this model to discuss the short run and long run effects of an increase in government purchases on output and the real interest rate in both the fixed and flexihle exchange rate cases.

37. Assume the Marshall-Lerner condition holds. Which of the following will cause an increase in net exports? A) an increase in government spending B) an increase in investment C) a reduction in foreign output D) a reduction in the real exchange rate E) all of the above 38. In an open economy, an increase in government spending will cause A) a reduction in domestic output. B) a reduction in imports. C) a reduction in net exports. D) all of the above E) none of the above 39. Suppose that the rest of the world experiences an economic boom causing an increase in foreign output (Y*). This increase in Y* will not cause which of the following to occur? A) the domestic country's output to increase B) the domestic country's consumption to increase C) the domestic country's output to increase and its trade balance to worsen as imports increase D) all of the above E) none of the above 40. We will generally observe that the more open an economy A) the larger the effect of fiscal policy on output…

Which of the following statements is true? A)The open-economy IS curve is derived in the same way that the closed-economy IS curve is derived. B)The closed-economy IS curve is downward sloping, but the open-economy IS curve is upward sloping. C)Some factors that shift the IS curve in the closed economy in one direction will shift the IS curve in the open economy in the opposite direction. D)Factors that raise a country's current net exports, given domestic output and the domestic real interest rate, shift the open-economy IS curve up.

In the short run of a model with sticky prices, a reduction in the money supply raises the nominal interest rate and appreciates the currency. In this case the country's expected real interest rate will In addition, the real exchange rate, after initially will subsequently The latter movement of the real exchange rate satisfies the real interest parity condition which indicates that a country's currency will be expected to undergo a real depreciation when its real interest rate ▼real interest rates elsewhere.