Unformatted text preview: more expensive. e. Foreigners find that its exports are cheaper and domestic residents find that imports from abroad are more expensive. Explain your answer. Problem 2 Money Markets: Suppose that the Fed sets the money supply and that money demand is given by M d =P = L(R; Y) as in class. a. What is the condition for money market equilibrium? Illustrate graphically. b. Illustrate the effect of an exogenous decrease in real income on the equilibrium interest rate (assuming prices are fixed). c. Suppose now that when output decreases, price also decreases. What happens to the interest rate now? Problem 3 Krugman, Obstfeld and Melitz Chapter 14 problem 9....
View Full Document
- Spring '08
- Economics, Department of Economics, domestic residents