EC111Class17Answers

EC111Class17Answers - EC111 MACROECONOMICS Spring Term 2012...

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EC111 MACROECONOMICS Spring Term 2012 EC111 Class 17 Solution Question 1. Imports are determined by domestic disposable income and price competitiveness as captured by the exchange rate. Expenditure on imported goods depends on income in much the same way (and with the same caveats) as expenditure on domestically produced consumption goods depends on disposable income. Demand for imports will further depend on the price of these goods. If the exchange rate appreciates so that foreign currency is cheap, then imports will also be less expensive and households will want to switch some of their expenditure from domestic to foreign goods. Exports are also determined by the exchange rate. An appreciation of the exchange rate makes domestically produced goods more expensive in terms of foreign currency For the foreign purchaser goods produced by the domestic economy have become more expensive and so demand for exports falls. As exports are simply the imports of foreign economies demand for them will also depend on foreign incomes. Question 2. (a) Y = C + I + G + X – F = 100 + 0.6(Y – 200) + 200 – r + 200 + 190 - 50e – (0.1Y + 50e) = [570 – 100e – r] + 0.5Y IS:
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EC111Class17Answers - EC111 MACROECONOMICS Spring Term 2012...

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