Consider the following hypothetical information about Americana in year t (measu
ID: 1208825 • Letter: C
Question
Consider the following hypothetical information about Americana in year t (measured in Americana dollars, $):
P = 2, MS = 320, L = 0.2Y – 2000R$
C = 200 + 0.75 (Y-T), T = 0.2Y, I = 50, G = 100 ,
CA = 100 – 0.1Y + 200E$/€*PEurope/PA.
Where, MS: nominal money supply, L: real money demand, R: interest rate, P: price index, C: consumption demand, I: investment demand, T: income tax, G: government purchases of goods and services, CA: current account, PA: price level in Americana, PEurope = Price level in Europe, E$/€: the exchange rate, and Y: national income (or national product).
Assume the Americana economy operates under a flexible exchange rate system. Also, assume the following initial values: R€= 0.05, PA = 2, PEueope = 2, and Ee$/€= 1.
A] Derive the DD equation, (DD is the goods market)
B] Derive the AA equation (AA is the money market)
C] What are the equilibrium values of Y and E$/€ that satisfy the goods, money and assets markets equilibrium. Provide graphical illustration.
D] Does Americana experience CA (current account) surplus or deficit? Provide numerical answer and graphical illustration.
E] What are the effects of a temporary expansionary fiscal policy in Americana that increases G from 100 to 150 on Y, E$/€, R$, (MS/P), and CA? Provide numerical answers and graphical illustration.
Tip: For a quadratic equation, aX2 +bX + C =0 è X = [-b ± (b2 – 4ac)]/2a
F] What are the effects of a temporary expansionary monetary policy in Americana that raises the real money supply from 160 to 200 on YA, E$/€, R$, and CAA? Provide numerical answer and graphical illustration.
G] Explain intuitively the different effects the above two polices have on the national income of Americana.
Explanation / Answer
1)Goods market Y=C+I+G+NX
Y=200+0.75*0.8Y + 50 +100+ 100 - 0.1Y + 200
solving Y= 1300
2) money market eqn Ms=L
0.2Y-2000R = 320
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