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Could you help with this Model of output, exchange rate, and interest rate de- termination The equations of the model we developed in class are:
Could you help with this
Model of output, exchange rate, and interest rate de- termination The equations of the model we developed in class are: (1) : Money Market Clearing: ? = bile. Y ) Et-F E (2) : Uncovered Interest Parity: = i* + EPpP* (3) : Goods Market Equilibrium: Y =C (Y -T)+1({)+G+TB (Y T, 5 Y*) I is the nominal exchange rate (units of domestic currency per unit unit of foreign currency), E is the expected nominal exchange rate, P is the domestic price level, 7 is the domestic interest, * is the foreign interest rate, Y* is foreign output, and M? is the money supply. We assume that E* is constant unless told otherwise. L ('money demand') is decreasing in its first argument and increasing in its second ar- gument. C' ('consumption demand') is increasing in Y T, and T'B ('trade balance') is decreasing in Y, increasing in Y*, and increasing in the real exchange rate, %. We also have C(Y = T) +TB (Y - T, %,Y*) is increasing in Y, but it increases (decreases) by less than 1 when Y increases (decreases) by 1. G denotes government expenditures and [ denotes investment, which is decreasing in 7. In the short run, the price level is sticky. The LM schedule represents Y, combinations such that equation (1) is satisfied. The IS schedule represents Y, i combinations such that equation (2) and (3) are satisfied. Under a flexible or floating exchange rate, the equilibrium nominal exchange rate is free to adjust and money supply is constant (unless told otherwise). Under a credible fixed exchange rate, money supply adjusts so that the nominal exchange rate is constant at the target level. Question 1 Suppose the consumption function is =2 +0.95( T). 1 The trade balance function is 1 TBS(IE) 025(Y 8). The investment function is I=2-10i Government spending is G. The forex market equilibrium is given by 1-F p=tk] e E Write an equation that characterizes the IS curve. That is, write an equation that contains Y, i, T, G and other numbers that represents combinations of Y and 2 that satisfy goods market equilibrium and forex market equilibrium. What is the slope of this IS curve? (e.g. defined as the reduction in Y for an increase in i of one unit, )Step by Step Solution
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