- 2 A Small Open Economy With Perfect Capital Mobility Is Characterized By The Following Equations M 3y 401 P It I 1 (71.26 KiB) Viewed 59 times
2. A small open economy with perfect capital mobility is characterized by the following equations: M= 3Y - 401 P: it = i
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2. A small open economy with perfect capital mobility is characterized by the following equations: M= 3Y - 401 P: it = i
2. A small open economy with perfect capital mobility is characterized by the following equations: M= 3Y - 401 P: it = i. - SS1-S: SP P Assume Me= 60, 7 = 11, P* = 6 and it = 0.075. In the long run, purchasing power parity holds so that o=1. 3 a) Draw and explain the MM and the PPP curves b) What is the long run equilibrium? Suppose we are at this long run equilibrium but now My increases by 30 to 90. c) What is the new long run equilibrium? Explain your answer using a diagram. d) What happens to the nominal exchange rate in the short run? Draw a diagram and explain what will happen.