Handout 10 Key

# Handout 10 Key - Econ 3140-2 Fall 2009 Handout #10 Answer...

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Econ 3140-2 Fall 2009 Handout #10 Answer Key 1. (Question Three from Abel et.al., Chapter 13, numerical problems) (a) Start by writing the equation of the IS curve S d I d ± = NX where S d = Y C d G , Y (300 + 0 : 5 Y 200 r ) G and NX = 150 & 0 : 1 Y & 0 : 5 e with e = 20 + 600 r ) NX = 150 & 0 : 1 Y & 0 : 5 (20 + 600 r ) , 140 & 0 : 1 Y 300 r Then the IS curve equation comes from: (0 : 5 Y 300 + 200 r G ) (200 300 r ) = 140 & 0 : 1 Y 300 r , 800 r = 640 & 0 : 6 Y + G (b) With G = 100 and Y = 900 , the IS curve is: 800 r = 640 540 + 100 , r = 0 : 25 Then using r = 0 : 25 we get e = 170 ; NX = 25 , C = 700 , and I = 125 (c) With Y = 940 , the IS curve is: 800 r = 640 564 + 100 , r = 0 : 22 Then using r = 0 : 22 we get e = 152 ; NX = 20 , C = 726 , and I = 134 Then a rise in the domestic output reduces the real interest rate and the real exchange rate, increases net exports, consumption and investment. Note: the increase in the domestic output has an ambiguous e/ect on net exports

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## This note was uploaded on 03/10/2010 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell University (Engineering School).

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Handout 10 Key - Econ 3140-2 Fall 2009 Handout #10 Answer...

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