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ECMC61 Assignment1

# ECMC61 Assignment1 - ECMC61 Assignment1 Question 1(a X 9000...

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ECMC61 Assignment1 Question 1 (a) X Y Z Gross domestic product, GDP 9000 10000 8500 Consumption, C 5040 5600 4760 Investment, I 1350 1445 1445 Government spending, G 2550 4400 910 Taxes, T 3000 4120 910 Exports of goods and services, EX 2700 2718 4198 Imports of goods and services, IM 2640 4163 2813 Private saving, S P 960 280 2830 Public saving, S G 450 -280 0 National saving, S 1410 0 2830 Net unilateral transfer 0 0 0 Current account, CA 60 – 1445 1385 Sales of country’s financial assets to foreign residents 1973 3293 375 Purchases of foreign financial assets by domestic residents 375 1545 2138 Official reserve transactions, ORT -1583 -428 428 Financial account, KA 15 1320 -1325 Capital account -75 125 -50 (b) Since X and Z hold a positive CA , so they are the countries that accumulate foreign wealth (according to the definition of CA). Question 2 (a) Home: Given: (hY-kR) – (hY-k(1+R)) = 50000 Y = 67500, MS = 60000 R = 6% = 0.06 Foreign: Given: (hY-kR) – (hY-k(1+R)) = 50000 Y = 45000, MS = 40000 R* = 4% = 0.04 By what is given, we have: Home: (0.4 * 675000 – 0.06k) – (0.4*67500 – 1.06k) = 50000 => k = 50000

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Then the money demand function become: L(R,Y) = 0.4*67500 – 50000*0.06 By L(R,Y) = MS/P we have : P = MS/L(R,Y) = 60000/(0.4*67500-50000*0.06) = 2.5 The price level of home is 2.5 Similarly, Foreign: P = MS/L(R,Y) = 40000/(0.4*45000-50000*0.06) = 2.5 The price level of foreign is 2.5 To find the exchange rate , we use the equation: R = R* + ( Ee – E)/E Since Ee is at par, so Ee = 1, R = 6% and R* = 4% is given, so: 0.06 = 0.04 + (1-E)/E => E 0.9804 (b) 1) Short Run: In the short run, level of price is sticky and k also remain unchanged h = 0.425, exchange rate will change We have: MS/P = L(R,Y) => Home: (60000 * 1.15)/2.5 = 0.425 * 67500 – 50000*R => R = 0.2175 = 2.175% Similarly, Foreign: (40000*1.15)/2.5 = 0.425*45000 – 50000*R* => R* = 0.0145 = 1.45% For new exchange rate we have: R = R* + ( Ee – E)/E Since Ee = 1-0.238 = 0.9762, so we have: 0.2175 = 0.0145 + (0.9762 – E)/E => E 0.9696 2) Long Run: In the long run, an increase in level of money supply DOES NOT affect output and interest rate.
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ECMC61 Assignment1 - ECMC61 Assignment1 Question 1(a X 9000...

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