Consider a hypothetical open economy with a government spending (G) of $10,000 million, Taxes (T) are $8,000 , Consumption (C) is given by the equation C = 5000 + 0.5 (Y – T), Investment (I) is given by the equation
economics
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1. Consider a hypothetical open economy with a government spending (G) of $10,000
million, Taxes (T) are $8,000 , Consumption (C) is given by the equation C = 5000 + 0.5 (Y – T),
Investment (I) is given by the equation I = 10,000 – 300r, where r is the real interest rate in percent
and Net Export(NX) is given by the equation NX = 2500- 2500ɛ, given exchange rate ɛ, and real
interest rate r* = 5. Given this information about the components of the GDP, answer the following
questions based on this information (Hint: Y= C+I+G+NX, Where Y stands for the national income
(GDP))
1. In this economy, solve for national saving, investment, the trade balance and the equilibrium exchange rate.
2. Suppose now that G rises to 15, 000. Solve for national saving, investment, the trade balance
and the equilibrium exchange rate. Explain what you find.
2. [4 Points] The economy is in long-run macroeconomic equilibrium when the point of short-run
macroeconomic equilibrium is on the long - run aggregate supply curve. Using a graph, depict and
explain the short-run versus long-run effects of:
I. A contractionary monetary policy resulting in demand shock on the long-run macroeconomic equilibrium. Use one contractionary monetary policy to illustrate your analysis, explain the nature of the policy and clearly depict the direction of the shift and changes in the equilibrium point, where necessary.
II. An expansionary fiscal policy resulting in demand shock on the long-run macroeconomic
equilibrium. Use one expansionary monetary policy to illustrate your analysis, explain the
nature of the policy and clearly depict the direction of the shift and changes in the equilibrium
point, where necessary
