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ECO 300 – Intermediate Macroeconomics

Assignment 2

Problem 1. (Show your calculations)

Assume that an iPad in the US is $500 while in Switzerland it costs 400 Swiss Francs. Suppose the nominal Swiss Franc/Dollar exchange rate is 1.1 Swiss Francs per Dollar.

- What is the real exchange rate? Show your calculations.

- What would happen to the real exchange rate if the price of an iPad in Switzerland rose to 450 Swiss Francs?

- Assume the real exchange rate is fixed at the value calculated in part a, but the nominal exchange rate can change. However, like in part b, the Swiss Franc price of an iPad rises to 450. What would the nominal exchange rate change to?

Problem 2. (Show your calculations)

Assume we have the following:

Y = 5,000,000

C = 4,000,000

I = 1,000,000

G = 0

T = 0

- Assume MPC = 0.75. Suppose G goes from 0 to 100,000. Calculate the new Y.

- Assume MPC = 0.65 and G goes from 0 to 100,000, What would Y be now?

- Starting with part a. Suppose the government pays for the new spending of 100,000 by increasing taxes by 100,000. Calculate the new Y.

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