Assume that the LM curve for a small open economy with a fixed exchange rate is given by Y = 200r - 200 + 2(M/P). This IS curve is given by Y = 400 + 3G - 2T + 3NX - 200r. The function for the net exports is NX = 200 - 100e, where e is the exchange rate. The price level is fixed at 1.0, the world interest rate is r^* = 2.0 percent, and the exchange rate is initially 1.0.

a. If $M = 100 , G = 100$ , and $T = 100$ , solve for the equilibrium short-tun values of $Y$ and $N X$ . Is the initially given exchange rate equal to the equilibrium exchange rate?
b. If the Fed buys bonds in order to raise the money supply, will equilibrium $Y$ increase?

Question

Assume that the LM curve for a small open economy with a fixed exchange rate is given by Y = 200r - 200 + 2(M/P). This IS curve is given by Y = 400 + 3G - 2T + 3NX - 200r. The function for the net exports is NX = 200 - 100e, where e is the exchange rate. The price level is fixed at 1.0, the world interest rate is r^* = 2.0 percent, and the exchange rate is initially 1.0.

a. If

M = 100 , G = 100

, and

T = 100

, solve for the equilibrium short-tun values of

Y

and

N X

. Is the initially given exchange rate equal to the equilibrium exchange rate?
b. If the Fed buys bonds in order to raise the money supply, will equilibrium

Y

increase?

Quizplus · Accepted Answer

The Answer of Assume that the LM curve for a small open economy with a fixed exchange rate is given by Y = 200r - 200 + 2(M/P). This IS curve is given by Y = 400 + 3G - 2T + 3NX - 200r. The function for the net exports is NX = 200 - 100e, where e is the exchange rate. The price level is fixed at 1.0, the world interest rate is r^* = 2.0 percent, and the exchange rate is initially 1.0. a. If $M = 100 , G = 100$, and $T = 100$, solve for the equilibrium short-tun values of $Y$ and $N X$. Is the initially given exchange rate equal to the equilibrium exchange rate? b. If the Fed buys bonds in order to raise the money supply, will equilibrium $Y$ increase?

Assume That the LM Curve for a Small Open Economy M=100,G=100M = 100 , G = 100M=100,G=100

Assume That the LM Curve for a Small Open Economy $M = 100 , G = 100$