ECON 202, SPRING 2006
Malhar Nabar
April 14, 2006
MID TERM II
Instructions.
The maximum score is 100. Please answer all THREE questions.
Show all your
work. Simply writing down an answer (even if it happens to be the correct one) without adequate
demonstration of how you arrived at your answer will not get you full credit.
You may use a
scienti°c calculator. GOOD LUCK!
1. (
Forty°ve points
)
Open economy ISLM model (MundellFleming)
A small open economy with ±oating exchange rates is described by the following equations:
Interest rate:
r
=
r
°
= 0
:
05
(where
r
°
is the world interest rate)
Consumption:
C
= 100 + 0
:
8(
Y
°
T
)
°
6000
r
Investment:
I
= 150
°
1000
r
Net Exports:
NX
= 1000
°
0
:
5
Y
°
250
°
(where
°
is the real exchange rate)
Government expenditure:
G
= 250
Tax revenue:
T
= 250
Demand for Real Money Balances:
L
(
r; Y
) = 0
:
5
Y
°
2000
r
Supply of Real Money Balances:
M
P
= 400
Potential output:
Y
= 1200
(i.e. the output level associated with the natural rate of unemploy
ment)
a. (Five points)
Why would consumption be negatively related to the interest rate?
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 Spring '08
 Nabar
 Macroeconomics, Inflation, in‡ ation

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