B06-Tutorial3

# Principles of Macroeconomics (with Xtra!)

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Page 1 of 2 T HE U NIVERSITY OF T ORONTO AT S CARBOROUGH Division of Management ECM B06H – Macroeconomic Theory and Policy: A Mathematical Approach TUTORIAL #3 Q1. Suppose that a small open economy with perfect capital mobility and no risk premium is described by the following set of equations: Y = F(K bar ,L bar ) = 2400, C = 250 + 0.75(Y - T), I = 400 - 10r, G = 300, T = 200, r* = 5, and NX = 500 - 100 , a) Compute the real exchange rate. b) Compute net exports and the three kinds of saving (private, government or public, and international or rest of world). c) Suppose that the set of equations given above is not altered from 2002 to 2006 and that PPP holds. Compute the rate of appreciation (or depreciation) of the domestic currency during these five years if domestic inflation is 2 percent and foreign inflation is 5 percent. Q2. Suppose a small open economy with perfect capital mobility and no risk premium is characterized by the following set of equations: Y = F(K bar ,L bar ) = 832, C = 10 + 0.75(Y - T), I = 70 - 1000r, G = 100, T = 100, r* = 0.05, and NX = 195 - 40 ,

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Page 2 of 2 a) Compute the real exchange rate ( , ).
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• NoProfessor
• Inflation, real exchange rate, Small open economy

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