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# Question 2 (30 points) Chapters 4, 5 &amp; 6 Suppose the world consists of only one pair of open economies, country A and country B, and these...

Question 2 (30 points) - Chapters 4, 5 & 6

Suppose the world consists of only one pair of open economies, country A and country B, and these countries only trade with each other. Country A only produces food whose output is measured in standard units, where one unit of YA is equal to 250 kilograms of food. Country B only produces clothing in standard units, where one unit of YB is equal to 10 kilograms of clothing. The table below provides some selected information about the economies of these countries. Keep your answers to at least 4 decimal places.

Question 2 (30 points) — Chapters 4, 5 &amp; 6 Suppose the world consists of only one pair of open economies, country A and country B, and
these countries o_nly trade with each other. Country A only produces food whose output is
measured in standard units, where one unit of YA is equal to 250 kilograms of food. Country B
only produces clothing in standard units, where one unit of Y3 is equal to 10 kilograms of
clothing. The table below provides some selected information about the economies of these
countries. Keep your answers to at least 4 decimal places. Production function: YA : 3&gt;&lt;K050L0A50
Capital stock: K : 500 Labour su l : L : 500 Consum-tion function: C : 150 + 0.5 Y — T Countr B
Production ﬁlnction: Y3 = K0-50L0-50
Capital stock: K I 850
Labour su l : L 2 850
Consum-tion function: C : 110 + 0.65 Y — T Investment function: I : 804 — 80r Investment function: I : 150 — 90r
Gov’t sector: G = 100 &amp; T = 100 Gov’t sector: G = 110 &amp; T = 110 Net export function: NX : 841 — 975XSB\$IA\$ Monetary sector:
42' M
Real money demand : [P]? 0.8Y — 100r Nominal urice level = l Monetary sector: Real money demand : [ Nominal rice level 2 1 Use the long-run classical model of an open economy to answer the following questions. Both
countries have perfect ﬁnancial capital mobility and no risk premium.
Hint: Since there are only two open economies, both are large open economies.

a) Determine the long-run equilibrium level of food and clothing production. (4 points)
b) Suppose absolute purchasing power parity holds for these countries. Solve for: - The nominal exchange rate, e13\$ng - The real exchange rate, 313\$ I As; Also, for each country, determine the long-run equilibrium levels of:
0 The trade balance; ' The domestic nominal money supply;
' The domestic real rate of interest; ' The unemployment rate; and ' Output per worker. Support your answer with one set of diagrams, one for the (Country A) loanable funds market
and one for the (Country A) foreign exchange market. Which country has a better standard
of living? (11 points) 0) Suppose the government of country A decides to implement a new law that imposes a (binding) minimum real wage. Redo parts (a) and (b). Explain in words only which country
has a better standard of living &amp; why. (15 points)
Support your answer with one NEW set of diagrams, one for the (Country A) loanable funds
market and one for the (Country A) foreign exchange market. Be sure to label the initial and
new long-run equilibrium points and provide an explanation on Whether the values of
variables of interest change or remain unchanged.

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