Question 2 - The Mundell-Fleming model with a fixed exchange rateConsider the Mundell-Fleming model of a small open economy with a constant price level anda flexible exchange rate. Assume that the following variables are exogenously set: G=500;T=1,000. In addition, the consumption function is given by: C=50+0.7(Y-T).Planned investment is given by: IP = 1000 - 50r.The world real interest rate is 6%.Net exports are given by: NX-500-100Є (ε=real exchange rate)Money supply isMS= 1200MdMoney demand is = Y - 40r.PFirst, compute the equilibrium exchange rate. You do not need to report this value in theanswer, but you will need it for the calculations below. Assume that the Central Bank wants tomaintain the exchange rate fixed at this level.Now suppose that consumer confidence declines. As a result, autonomous consumptiondecreases to 30. If the Central Bank wants to maintain the exchange rate fixed, by how muchshould the Central Bank change its money supply?

Given;To calculate the equilibrium exchange rate and find the effect of a fall in autonomous…

Question 2 - The Mundell-Fleming model with a fixed exchange rate Consider the Mundell-Fleming model of a small open economy with a constant price level and a flexible exchange rate. Assume that the following variables are exogenously set: G=500; T=1,000. In addition, the consumption function is given by: C=50+0.7(Y-T). Planned investment is given by: IP = 1000 - 50r. The world real interest rate is 6%. Net exports are given by: NX-500-100 (ε=real exchange rate) Money supply is Money demand is MS = 1200 P Md =Y-40r. First, compute the equilibrium exchange rate. You do not need to report this value in the answer, but you will need it for the calculations below. Assume that the Central Bank wants to maintain the exchange rate fixed at this level. Now suppose that consumer confidence declines. As a result, autonomous consumption decreases to 30. If the Central Bank wants to maintain the exchange rate fixed, by how much should the Central Bank change its money supply?.

Question 2 - The Mundell-Fleming model with a fixed exchange rate Consider the Mundell-Fleming model of a small open economy with a constant price level and a flexible exchange rate. Assume that the following variables are exogenously set: G=500; T=1,000. In addition, the consumption function is given by: C=50+0.7(Y-T). Planned investment is given by: IP = 1000 - 50r. The world real interest rate is 6%. Net exports are given by: NX-500-100 (ε=real exchange rate) Money supply is Money demand is MS = 1200 P Md =Y-40r. First, compute the equilibrium exchange rate. You do not need to report this value in the answer, but you will need it for the calculations below. Assume that the Central Bank wants to maintain the exchange rate fixed at this level. Now suppose that consumer confidence declines. As a result, autonomous consumption decreases to 30. If the Central Bank wants to maintain the exchange rate fixed, by how much should the Central Bank change its money supply?.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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