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ECON202midterm2_s06

# ECON202midterm2_s06 - ECON 202 SPRING 2006 Malhar Nabar MID...

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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 IS-LM model (Mundell-Fleming) 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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ECON202midterm2_s06 - ECON 202 SPRING 2006 Malhar Nabar MID...

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