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Based on the above information, answer the following questions. a) (2 marks) If the price level P is fixed at P = P = 1,
Based on the above information, answer the following questions. a) (2 marks) If the price level P is fixed at P = P = 1, and the exchange rate is fixed at e=e =1, what is the equilibrium value of Y*? b) (2 marks) If the price level P is fixed at P = P = 1, the money supply is fixed at M = M = 340 but the exchange rate e is flexible, what is the equilibrium value of Y-? c) (2 marks) If the price level P and the nominal wage W are flexible, but the exchange rate is fixed at e= =1, what is the equilibrium value of Y*? d) (2 marks) Suppose that the price level is fixed at P = P = 1 in the short run, but both P and the nominal wage W are flexible in the long run. The nominal money supply reduced to M = M = 310 but the exchange rate e is flexible, what is the equilibrium value of Y in the short run and long run? e) (2 marks) Illustrate the effects of the policy change in question d) above using an appropriate diagram. Explain briefly.Question 1. (10 marks) Consider the following model of a small open macroeconomy: Production and Labour Market: Y = 48.75N - N=/2 Production function N = 60 - W/P (2) Labour demand N, = (0.5)W/P (3) Labour supply N. = N, = N (4) Labour market equilibrium Goods Market: C=149+0.75YD (5) Consumption function I =75+0.2Y-2001 (6) Investment function G =165 (7) Government expenditure YDEY-T (8) Disposable income T =Y/3 (9) Tax function NX =100-o.1Y+e/ P (10) Net export function Y =C+I+G+NX (11) Goods market equilibrium Money Market: L = 100 + 0.2Y - 2001 (12) Real money demand M/P (13) Money supply L = M/P (14) Money market equilibrium Balance of Payments: i = if = 0.05 (15) BP = 0 locus
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