Assume the following equations summarize the structure of a small open economy with a flexible exchange rate

Question:

Assume the following equations summarize the structure of a small open economy with a flexible system.
C = Ca + 0.85(Y - T)
Ca = 200 - 8r
T = 200 + 0.2Y
(M/P)d = 0.25Y - 25r
Ms/P = 2,250
Ip = 1,700 - 32r
G = 1,800
NX = 870 - 0.08Y - 200e
(a) Initially let foreign and domestic interest rates be equal, so that r = rf, and let the foreign (e) equal 2.
1. Derive the equation for net exports, NX.
2. Compute the value of the multiplier.
3. Derive the equation for the autonomous planned spending schedule, Ap.
4. Derive the equation for the IS curve.
5. Derive the equation for the LM curve.
6. Compute the equilibrium domestic and foreign interest rates (r and rf).
7. Compute equilibrium real output (Y).
(b) We now let the small economy’s domestic interest rate diverge temporarily from the foreign interest rate. Suppose that the monetary authority attempts to reduce output by decreasing the real money supply, Ms/P, by 50 to 2,200.
1. Derive the equation for the new LM curve.
2. Compute the new equilibrium domestic interest rate (r).
3. Compute the new (temporary) equilibrium real output (Y).
4. Given the decrease in the real money supply, compute the level of real output that equalizes domestic and foreign interest rates.
5. Find the foreign that equalizes domestic and foreign interest rates.
(c) Again we let the domestic interest rate diverge temporarily from the foreign interest rate. Suppose that fiscal policymakers decrease government spending (G) by 80 to 1,720. Assume that the value of the real money supply equals 2,250.
1. Derive the equation for the new autonomous planned spending schedule, Ap.
2. Derive the equation for the new IS curve.
3. Compute the new equilibrium domestic interest rate (r).
4. Compute the new (temporary) equilibrium real output (Y).
5. Given that there has been no change in the real money supply, compute the level of real output that equalizes domestic and foreign interest rates.
6. Find the foreign that equalizes domestic and foreign interest rates.
(d) Based on your answers to parts b and c, compare and contrast the effectiveness of monetary and fiscal policy in a small open economy with a flexible system.
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...