- Please Answer Part C Thanks 1 (95.54 KiB) Viewed 74 times
Please answer part c. Thanks!
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Please answer part c. Thanks!
Please answer part c. Thanks!
Q1 (20 points) Consider an open economy with fixed exchange rate EDIF = E*. The money demand is: Y L(RD, Y) = (1 + R₂)² where RD is the domestic interest rate and Y is the output. the price level P is 1. ** Part a (5 marks) The money market is in equilibrium. Find the domestic interest rate RD in terms of Y and Ms. ** Part b (5 marks) Suppose that due to Covid-19, the output Y of a country decreases by 10% this year. Find by how much the money supply needed to shrink in order to keep the exchange rate constant (everything else holds constant). ** Part c (10 marks) Now suppose that instead of decreasing the money supply as in Part b, M, is held constant (Y still decreases by 10%). Find out by how much Rp increases/decreases. Suppose that RD before the decrease in Y is 0.20.
Q1 (20 points) Consider an open economy with fixed exchange rate EDIF = E*. The money demand is: Y L(RD, Y) = (1 + R₂)² where RD is the domestic interest rate and Y is the output. the price level P is 1. ** Part a (5 marks) The money market is in equilibrium. Find the domestic interest rate RD in terms of Y and Ms. ** Part b (5 marks) Suppose that due to Covid-19, the output Y of a country decreases by 10% this year. Find by how much the money supply needed to shrink in order to keep the exchange rate constant (everything else holds constant). ** Part c (10 marks) Now suppose that instead of decreasing the money supply as in Part b, M, is held constant (Y still decreases by 10%). Find out by how much Rp increases/decreases. Suppose that RD before the decrease in Y is 0.20.