# PS 6 with answers - METU Department of Economics Econ 202...

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1 / 4 METU Department of Economics Econ 202 Macroeconomic Theory Instructors : Şirin Saraçoğlu -Ebru Voyvoda 2010-2011 Spring Semester Problem Set 6 with answers Q.1 Consider an economy summarized by the following equations: 𝐶 = 300 + 0.75? 𝐷 ; 𝑇 = 0.2? ; 𝐼 = 600 − 10𝑖 ; 𝐺 = 300 ? = 300 + 150 𝐸𝑃 𝑃 + 0.1? ; 𝑀 = 200 − 100 𝐸𝑃 𝑃 + 0.2? 𝑀 𝑑 = 0.5? − 25𝑖 ; 𝑀 𝑠 = 1000 where E is the nominal exchange rate defined as price of foreign currency in terms of domestic currency and price levels are equal to 1. Assume that there are only 2 countries in the world. ? corresponds to GDP of foreign country and currency of this country is called as “foreign currency”. a) What is the equilibrium level of output, interest rate, government budget balance and the current account when 𝐸 = 2 and ? = 3000 ? ? = ? ? + ?(? − ??) + 𝑰 + 𝑮 + ? ? + ?𝑬 + 𝒙? − ? ? + ?𝑬 − ?? ? = ? ? + 𝑰 + 𝑮 + ? ? − ? ? + ?? + (? + ?)𝑬 − ?? ? − ? + ?? + ? = ? ? + (? + ?)𝑬 − ?? 𝒌 ? ? = ?? − ?? => ? = ?? − ? ? ? ? = ?(? ? + (? + ?)𝑬) + ?? ? ?𝒌 + ?? => ? = ???? ; ? = ??. ? 𝑻 − 𝑮 = ?. ? ∗ ???? − ??? = ??? ??? = ?? = ? − ? = ??? + ??? ∗ 𝑬 + ?. ?? − ??? + ??? ∗ 𝑬 − ?. ?? = ??? b) What should be the level of 𝑀 𝑠 to keep Y at its initial value while running balanced current account and balanced budget ? What is the new level of interest rate? Assume that ? stays same. To run balanced current account, the following equation must hold: ?? = ? − ? = ? ? = ???? + ????𝑬 𝑰? ? = ???? => 𝑬 = ?. ? To eliminate budget surplus, government should increase its expenditures by 325.

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