7. This question explores IS and FX equilibria in a numerical example. a. The consumption function is

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7. This question explores IS and FX equilibria in a numerical example.

a. The consumption function is C = 1.5 + 0.8 (Y − T). What is the marginal propensity to consume? What is the marginal propensity to save?

b. The trade balance is TB = 5(1 − [1/E]) − 0.2(Y − 8). What is the marginal propensity to consume foreign goods? What is the marginal propensity to consume home goods?

c. The investment function is I = 3 − 10i. What is investment when the interest rate i is equal to 0.10 = 10%?

d. Assume government spending is G. Add up the four components of demand and write down the expression for D.

e. Assume forex market equilibrium is given by i = ([1/E] − 1) + 0.15, where the two foreign return terms on the right are expected depreciation and the foreign interest rate.

What is the foreign interest rate? What is the expected future exchange rate?

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International Macroeconomics

ISBN: 9781319061722

4th Edition

Authors: Robert C Feenstra ,Alan M Taylor

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