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EC202_D1_ProblemSet2Sp2010

EC202_D1_ProblemSet2Sp2010 - idea not work in real world...

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EC202 -D1 Problem Set 2 Spring 2010 1. In the economy of Solomania, economists know the following macroeconomic relationships. The economy of Solomania is a small open economy. Y = K 1/2 L 1/2 = 50,000 C = 1000 + 0.8 (Y – T) I = 5000 – 1000 r r = r* = 0.1 T = 10,000 G = 60,000 NX = - 1000 e (a) Find the equilibrium e. (b) Suppose the government increases spending by 10000. What will be the new equilibrium value of Y, r, I, C, and NX? (20 points) 2. Define and explain the concept of real exchange rate. 3. Define and explain the concept of Purchasing Power Parity Theory. Why may this
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Unformatted text preview: idea not work in real world that we live in? 4. Suppose you are given the following information on an economy: y = k 1/2 s = 0.25 d = 0.15 k = 9 (a) What are the steady state values of k, y, s, c, and i? Now suppose the s increases from 0.25 to 0.3. What will be the new steady state values of k, y, s, c, and i? (b)What is rate of growth of y in the new steady state? (c) What is the rule for determining the k* for optimal consumption? What is the k* for optimal consumption in this economy?...
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