2. A small open economy is described by the following equations: C = 50+0.75 (Y-T) I= 200-20r NX = 200-50€ M/P= Y-40r G=

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2 A Small Open Economy Is Described By The Following Equations C 50 0 75 Y T I 200 20r Nx 200 50 M P Y 40r G 1 (253.92 KiB) Viewed 77 times

2. A small open economy is described by the following equations: C = 50+0.75 (Y-T) I= 200-20r NX = 200-50€ M/P= Y-40r G= 200 T= 200 M= 3,000 P=3 r* = 5 Use the equilibrium exchange rate, income, and net exports you calculated in problem set 4. Assume a fixed exchange rate. Calculate what happens to the exchange rate, income, net exports, and the money supply if the government increases its spending by 50. Use a graph to explain what you find. 4. The Mundell-Fleming model takes the world interest rate r* as an exogenous variable. Let's consider what happens when this variable changes. a. If the economy has a fixed exchange rate, what happens to aggregate income, the exchange rate, and the trade balance when the world interest rate rises?