A small open economy can be described by the following equations:

DD equation: Y = 8000 + G - 600P + 200E

AA equation: Y = 500 + 2(MS/P) + 80Ee - 40E

Full-employment output: Y_FE = 8000

Note: Exchange rate is quoted as E_DC/FC. Keep your answer to two decimal places if needed.

a) In the initial long-run equilibrium, the government collects 15% of long-run output as taxes and runs a budget deficit of 400, while the central bank sets the level of (nominal) money supply to 33100. Find the (long-run) equilibrium levels of exchange rate and aggregate price if the expected exchange rate (E^e) is 22.

Suppose the economy is initially in its long-run equilibrium as described in part (a). Due to recent drop in house prices, households change their spending habits such that for any given level of exchange rate the demand for goods & services changes by 400. At the same time, the government increases its spending by changes 80. In addition, the (combined) permanent shocks will cause the expected exchange rate to change by 0.8 DC per FC.

b) If the economy adopts a flexible exchange rate and the changes are short-lived, find the short-run equilibrium levels of output and exchange rate.

c) (Continued from part b). Suppose the central bank finds the change in output in part (b) undesirable and wants to keep it at the full-employment level via a (temporary) change in monetary policy. Find the level of money supply that would achieve this goal.

d) If the economy adopts a flexible exchange rate and the changes are long lasting, find the short-run equilibrium levels of output and exchange rate.

e) Instead of adopting flexible exchange rate, the economy adopts a fixed exchange rate and the official rate is set at the one calculated in part (a). In addition, the fixed exchange rate is maintained by a change in real money supply. Answer the following questions:

If the changes are short-lived, find the short-run equilibrium levels of output and real money supply.

If the changes are long lasting, find the short-run equilibrium levels of output and real money supply.