ECON
macro_questions

# How this tendency would affect the slope of the lm

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rate increases. How this tendency would affect the slope of the LM curve? 2

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[Part C] A Small Open Economy (1) Suppose the price of a Big Mac is \$2.42 in the US and 9.90 yuan in China. In addition, suppose the nominal foreign exchange rate is 8.28 yuan per dollar. Calculate the real exchange rate. (2) Would you advise the leader of a small open economy to adopt a fixed or floating exchange rates? Why? (3) Explain why a monetary contraction for a small open economy under fixed exchange rates will have no effect on real GDP (4) Use IS * - LM * model to answer the following questions (a) Suppose congress increase tax in order to balance the budget. Use the IS * - LM * model with fixed exchange rates to illustrate graphically the short-run impact on the dollar exchange rate and output in the US. (b) Suppose the government of a small open economy with a ﬂoating exchange rate imposes 50-percent tariffs on all imports. Use the IS * - LM * model with fixed exchange rates to illustrate graphically the short-run impact on the exchange rate and output in the country. (c) Economic expansion throughout the rest of the world raises the world interest rate. Use the IS * - LM * model with fixed exchange rates to illustrate graphically the short-run impact on the exchange rate and output in a small open economy. 3
[Part D] Aggregate Supply (1) Assume that an economy operates according to the sticky-wage model. The nominal wage was set to make labor supply and labor demand equal when the expected price level equaled 120 as measured by the consumer price index.
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