ECN 306 Homework 2

ECN 306 Homework 2 - Assume that consumption is given by C...

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ECN 306 Spring 2010 Homework #2 1.) Estonia maintains a fixed exchange rate for its currency the kuna at a rate of 10 kuna = 1 Euro. The Estonian central bank has issued 20 billion kuna that are in circulation in the economy, and it holds reserves of 2 billion Euros. Most likely, the exchange rate regime in Estonia is:___________________. 2.) An open economy is characterized by Y + M = C + I +G + X and has I=X=G = 50 and M= 60. a. Assume that consumption is given by C = 10 + 0.9Y. Equilibrium GNP (Y) is _____________. b. Now assume that rather than having M=60, we have M = 20 + 0.1Y. Equilibrium Y is ________ and Imports are: _________ c.
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Unformatted text preview: Assume that consumption is given by C = a + b(Y-T) where T is taxes and M = d + eY. Write an expression for equilibrium GDP (Y): 3. Let Y +M = C + I + G + X Where C = 20+0.9 (Y-T), M=10 +0.4Y, and G=T=X = I= 100 a.) what is the equilibrium level of Y, and what is the balance of payments? b.) Suppose the government wants X=M. Is there a level of G that can achieve this? If so what is it? c.) Suppose the government wants X=M. Is there a level of T that can achieve this? If so what is it? Hint: To find G or T, first calculate the level of Y at which X=M. Then find the level of G or of T that would give you that level of Y....
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