1. A small open economy is described by the following equations: C = 50 + 0.75(Y − T ) I = 200 − 20r NX = 200 − 50ε M/P = Y − 40r G = 200 T = 200 M = 3000 P=3 r∗ = 5 (a) Assume a floating exchange rate. Calculate what happens to the exchange rate, the level of income, net exports, and the money supply if the government increases its spending by 50. Use a graph to explain what you find. (b) Now assume a fixed exchange rate. calculate what happens to the exchange rate, the level of income, net exports, and the money supply if the government increases its spending by 50. Use a graph to explain what you find.
1. A small open economy is described by the following equations: C = 50 + 0.75(Y − T ) I = 200 − 20r NX = 200 − 50ε M/P = Y − 40r G = 200 T = 200 M = 3000 P=3 r∗ = 5 (a) Assume a floating exchange rate. Calculate what happens to the exchange rate, the level of income, net exports, and the money supply if the government increases its spending by 50. Use a graph to explain what you find. (b) Now assume a fixed exchange rate. calculate what happens to the exchange rate, the level of income, net exports, and the money supply if the government increases its spending by 50. Use a graph to explain what you find.
Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter19: International Finance And The Foreign Exchange Market
Section: Chapter Questions
Problem 14CQ
Related questions
Question
1. A small open economy is described by the following equations:
C = 50 + 0.75(Y − T ) I = 200 − 20r
NX = 200 − 50ε M/P = Y − 40r
G = 200
T = 200 M = 3000
P=3 r∗ = 5
(a) Assume a floating exchange rate. Calculate what happens to the exchange rate, the level of income, net exports, and the money supply if the government increases its spending by 50. Use a graph to explain what you find.
(b) Now assume a fixed exchange rate. calculate what happens to the exchange rate, the level of income, net exports, and the money supply if the government increases its spending by 50. Use a graph to explain what you find.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 6 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Macroeconomics: Private and Public Choice (MindTa…
Economics
ISBN:
9781305506756
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Economics: Private and Public Choice (MindTap Cou…
Economics
ISBN:
9781305506725
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Managerial Economics: Applications, Strategies an…
Economics
ISBN:
9781305506381
Author:
James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:
Cengage Learning
Macroeconomics: Private and Public Choice (MindTa…
Economics
ISBN:
9781305506756
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Economics: Private and Public Choice (MindTap Cou…
Economics
ISBN:
9781305506725
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Managerial Economics: Applications, Strategies an…
Economics
ISBN:
9781305506381
Author:
James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:
Cengage Learning