homework3spring2007amended

homework3spring2007amended - Economics 302 Spring 2007...

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Sheet1 Page 1 Economics 302 Spring 2007 Homework #2 Due Tuesday, March 13 Homework will be graded for content as well as neatness. Sloppy or illegible work will not receive full credit. 1. Cowtopia is a small economy in the North. It produces milk with a standard (constant The technology level, A, is 10 households in Cowtopia have aggregate demand for milk which is a linear function of disposable income. In particular, C = 250 +.5(Y-T). The government spends 500 each year and runs a balanced budget. Finally, domestic firms have aggregate investment demand I = 1000-50r a. What is the equilibrium real interest rate? Include a graph to explain the market clearing condition. Now, suppose that Cowtopia receives advice from the IMF (The International Monetary Fund) to open its economy to the outside world. b. Explain what the domestic interest rate will be and why. Use a graph and explain how your answer and the equilibrium condition are different from in part (a). Be sure to explain in particular why the domestic interest rate would always be what you say. What do you need to assume for this to be the case?
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homework3spring2007amended - Economics 302 Spring 2007...

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