Answer to Question #64186 in Microeconomics for GG
This is it;
-The home country is currently in its LR eq'm with:
P=1, M1s=1, G1=T1=0, Y1=Ypotential
-Foreign variables: i*=2(%), P*=1
-Assume that the IS curve is a straight line, and that its slope is preserved.
-Investment depends negatively on i.
-Money demand: Md=Px(Y-i)
-The initial IS curve labelled IS1 is shown in the handout.
-In the LR:
1) PPP holds, and
2) the expected ER is equal to the spot ER.
Q. Given the initial values of P=1 and M1s=1, find the equation of the initial LM1 curve.
Q. Using the initial IS1 curve in the handout and the LM1 curve obtained in Q1, find the values of (Y,i) in the initial eq'm .
Q. Given the "Equilibrium1", find the values of (i, E, Ee) in the corresponding initial eq'm in the FX market.
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