64 730
Assignments Done
99,3%
Successfully Done
In September 2018

Answer to Question #63611 in Macroeconomics for Anna

Question #63611
Assume perfect capital mobility and fixed exchange rates. Furthermore, assume that no changes in the nominal exchange rate are expected and that there are no risk premia. The economy in characterized as follows: LM curve: i = 0.5Y - 0.1 M/P, IS curve i = -Y + R + 100, nominal exchange rate E = 7.5, price level P = 2, world interest rate i^W = 5.5, world price level P^W= 2. Calculate the change in Y if the price level changes from P_0=2 to P_1=1.
Expert's answer
LM curve: i = 0.5Y - 0.1 M/P, IS curve i = -Y + R + 100, nominal exchange rate E = 7.5, price level P = 2, world interest rate i^W = 5.5, world price level P^W= 2.
In equilibrum LM = IS, so:
0.5Y - 0.1 M/P = -Y + R + 100,
1.5Y = R + 0.1 M/P + 100
Y = (R + 0.1 M/P + 100)/1.5
The change in Y if the price level changes from P_0 = 2 to P_1 = 1 is:
Y1 - Y0 = (R + 0.1 M/1 + 100)/1.5 - (R + 0.1 M/2 + 100)/1.5 = 0.05M.

Need a fast expert's response?

Submit order

and get a quick answer at the best price

for any assignment or question with DETAILED EXPLANATIONS!

Comments

No comments. Be first!

Leave a comment

Ask Your question

Submit
Privacy policy Terms and Conditions