International Monetary Economics

Consider an open economy (home country) trading with the rest of the world (foreign country) in goods, services, and assets, taking the foreign interest rate 2* and price level P* as given. The central bank of this economy targets the domestic nominal interest rate, i, while allowing for free international capital mobility and floating exchange rate E (the price of foreign currency in units of home currency). Assume that the nominal prices of goods are fixed P = P* = 1 and the expected future exchange rate E = 1 in the short run, and the economic relations of home country are characterized by the following equations. aggregate consumption demand, C = 4 + 0.6(Y - T), aggregate investment demand, I = 6 - 20 i, government expenditure, G, taxes on domestic residents, T, aggregate exports, EX = 1 + 5 (1 - -), aggregate imports, IM = 0.2(Y - T), aggregate demand, D = 16 + G + 0.4(Y - T) - 202 -5 (), aggregate demand for real balances, L(i) Y = ( 14. ) Y, aggregate real money supply, M = M. Assume that i* = 8%, i = 5%, and G = T = 9. Use the information to determine the short run equilibrium values of E, Y, M, and NX. (Round your answers to two decimal places.) Nominal exchange rate, E Aggregate output, Y Aggregate money supply, M Aggregate net exports, NX Suppose now that the home country changes its government spending and taxes to G = T = 5. The new short-run equilibrium aggregate output, Y