2. A small open economy with perfect capital mobility is characterized by the following equations: 𝑀𝑡 =3
Posted: Thu May 19, 2022 9:29 am
2. A small open economy with perfect capital mobility is
characterized by the following equations:
ππ‘ =3πβ40π ππ‘
ππ‘ = πβ β ππ‘+1βππ‘ ππ‘
π = ππ πβ
Assume ππ‘ = 60, π = 11, πβ =
6 and πβ = 0.075. In the long run, purchasing power
parity holds so that π = 1 .
a) Draw and explain the MM and the PPP curves (30%)
b) What is the long run equilibrium? (20%)
Suppose we are at this long run equilibrium but
now ππ‘ increases by 30 to 90.
c) What is the new long run equilibrium? Explain your answer
using a diagram. (20%)
d) What happens to the nominal exchange rate ππ‘in the short
run? Draw a diagram and explain what will happen. (30%)
characterized by the following equations:
ππ‘ =3πβ40π ππ‘
ππ‘ = πβ β ππ‘+1βππ‘ ππ‘
π = ππ πβ
Assume ππ‘ = 60, π = 11, πβ =
6 and πβ = 0.075. In the long run, purchasing power
parity holds so that π = 1 .
a) Draw and explain the MM and the PPP curves (30%)
b) What is the long run equilibrium? (20%)
Suppose we are at this long run equilibrium but
now ππ‘ increases by 30 to 90.
c) What is the new long run equilibrium? Explain your answer
using a diagram. (20%)
d) What happens to the nominal exchange rate ππ‘in the short
run? Draw a diagram and explain what will happen. (30%)