Hint: Since there are only two open economies, both are large open economies. a) Determine the long-run equilibrium level of food and clothing production. (4 points) b) Suppose absolute purchasing power parity holds for these countries. For each country, determine the long-run equilibrium levels of: The trade balance; The domestic nominal money supply; The real exchange rate (in the usual orientation # of foreign per domestic, EFC/DC); The nominal exchange rate (in the usual orientation of # of foreign currency per domestic currency); The domestic real rate of interest; . The real wage rate of labour and real rental rate of capital; The unemployment rate; and Output per worker. Support your answer with one set of diagrams, one for the (Country A) loanable funds market and one for the (Country A) foreign exchange market. Which country has a better standard of living? (11 points) c) Suppose the government of country A decides to implement a new law that imposes a minimum real wage of 1.75. Redo parts (a) and (b). Explain in words which country has a better standard of living & why. (15 points) Support your answer with one NEW set of diagrams, one for the (Country A) loanable funds market and one for the (Country A) foreign exchange market. Be sure to label the initial and new long-run equilibrium points and provide an explanation on whether the values of variables of interest change or remain unchanged. Note: There is no need to do any calculation. Written explanation will be sufficient. MGEB06 Assignment 2 (Winter 2022) 2MGEB06 - All lectures Macroeconomic Theory and Policy: A Mathematical Approach Assignment 2 Due: On or before Friday, April 8th 11:30pm (Note: Assignments submitted after Friday, April 8" at 11:30pm WILL NOT BE accepted under ANY circumstance.) Instructions: You can submit an individual or group assignment. If you submit a group assignment, there must be no more than FIVE students in your group and Your group may consist of students enrolled in ANY section. All submissions must be done via the Crowdmark platform. Label your graph(s); otherwise, marks will be subtracted. No credit will be given if you do not show your work. Your answer should be structured in a way such that those that know little about economics will have no difficulty understanding your argument/answer. Total marks: 100 points. Question 2 (30 points) - Chapters 4, 5, 6 & 7 Suppose the world consists of only one pair of open economies, country A and country B, and these countries only trade with each other. Country A only produces food whose output is measured in standard units, where one unit of YA is equal to 250 kilograms of food. Country B only produces clothing in standard units, where one unit of Y's is equal to 10 kilograms of clothing. The table below provides some selected information about the economies of these countries. Keep your answers to at least 4 decimal places. Country A Country B Production function: YA = 3xK0 50L 0.50 Production function: YB = KO.501 0.50 Capital stock: K = 500 Capital stock: K = 850 Labour supply: L = 500 Labour supply: L = 850 Consumption function: C = 150 + 0.5(Y-T) Consumption function: C = 110+ 0.65(Y-T) Investment function: I = 804 - 80r Investment function: I = 150 -90r Gov't sector: G = 100 & T = 100 Gov't sector: G = 110 & T = 110 Net export function: NX = 841 - 975E Net export function: NX = 748 - 614(1/E) Monetary sector: Monetary sector: Real money demand = COP =0.BY -100 Real money demand = P =0.9Y -200r Nominal price level = 1 Nominal price level = 1 Use the long-run classical model of an open economy to answer the following questions. Both countries have perfect financial capital mobility and no risk premium. MGEB06 Assignment 2 (Winter 2022)