A small open economy can be described by the following equations: Full-employment level of output: YFE = 24000 DD equation: Y = 18600 + G - 200P + 100EDC/FC AA equation: Y = 400 + 5(MS P ) + 30Ee - 20EDC/FC In the initial long-run equilibrium, households pay 20% of their total income as income taxes and the government runs a budget deficit of 600. Also, the level of (nominal) money supply is 69900 and the expected DC/FC exchange rate (Ee) is 30. Note: Keep your answer to 2 decimal places if needed. a) Find the long-run equilibrium levels of exchange rate and price. (5 points) The economy is initially in its long-run equilibrium as described in part (a). Suppose there is a once- and-for-all change in preference of holding money such that the AA equation becomes: AA equation: Y = 442 + 5(MS P ) + 30Ee - 20EDC/FC In addition, any permanent change will will lead to an adjustment in the expected exchange rate by 0.12 DC per FC. b) If the economy adopts a flexible exchange rate, find the new equilibrium levels of output and real money balance in both short run and long run. (10 points) c) If the economy opts for a fixed exchange rate, which is adjusted through changes in the real money supply, find the new equilibrium levels of output and real money balance in both short run and long run. (5 points)

Question 4 (20 points) (save your answer as H'WZQ-Lpdt) A small open economy can be described by the follouing equations: Full-employment level of output: YFE = 24000 DD equation: Y = 18600 + G 200P + 100EDC FC MS AA equation: Y = 400 + 5%) + 3013: 2013ch In the initial long-run equilibritun. households pay 20% of their total income as income taxes and the government runs a budget decit of 600. Also. the level of (nominal) money supply is 69900 and the expected DCfFC' exchange rate (13\") is 30. Note: Keep your answer to 2 decimal places if needed. a) Find the longrun equilibrium levels of exchange rate and price. (5 points) The economy is initially in its long-run equilibrium as described in part (a). Suppose there is a once- and-for-all change in preference of holding money such that the AA equation becomes: 1:. AA equation: Y = 442 + 5%) + 395e 205mm In addition. any permanent change will will lead to an adjustment in the expected exchange rate by 0.12 DC per FC. b) If the economy adopts a exible exchange rate. nd the new equilibrium levels of output and real money balance in both short run and long run. {10 points) c) If the economy opts for a xed exchange rate. which is adjusted through changes in the real money supply. find the new equilibritun levels of output and real money balance in both short run and long run. (5 points}