Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r - 200 + 2(M/P), while the IS curve is Y = 400 + 3G - 2T + 3NX - 200r. The function for NX is NX = 200 - 100e, where e is the exchange rate. The price level (P) is fixed at 1.0. The international interest rate is r^* = 2.5 percent.

a. Using the $L M$ curve, find the equilibrium level of $Y$ in the small open economy, if $M = 100$ .
b. Given this value of $Y$ , if $G = 100$ and $T = 100$ , what must be the equilibrium value of $N X$ ?
c. If this value of $N X$ is to be achieved, what must be the equilibrium exchange rate, $e$ ?

Question

Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r - 200 + 2(M/P), while the IS curve is Y = 400 + 3G - 2T + 3NX - 200r. The function for NX is NX = 200 - 100e, where e is the exchange rate. The price level (P) is fixed at 1.0. The international interest rate is r^* = 2.5 percent.

a. Using the

L M

curve, find the equilibrium level of

Y

in the small open economy, if

M = 100

.
b. Given this value of

Y

, if

G = 100

and

T = 100

, what must be the equilibrium value of

N X

?
c. If this value of

N X

is to be achieved, what must be the equilibrium exchange rate,

e

?

Quizplus · Accepted Answer

The Answer of Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r - 200 + 2(M/P), while the IS curve is Y = 400 + 3G - 2T + 3NX - 200r. The function for NX is NX = 200 - 100e, where e is the exchange rate. The price level (P) is fixed at 1.0. The international interest rate is r^* = 2.5 percent. a. Using the $L M$ curve, find the equilibrium level of $Y$ in the small open economy, if $M = 100$. b. Given this value of $Y$, if $G = 100$ and $T = 100$, what must be the equilibrium value of $N X$ ? c. If this value of $N X$ is to be achieved, what must be the equilibrium exchange rate, $e$ ?

Assume That the LM Curve for a Small Open Economy LML MLM

Assume That the LM Curve for a Small Open Economy $L M$