Macroeconomic Theory; questions 1-5

Suppose that an economy is characterized by the following behavioral equations: 10059 C 0.8YD+??50r E 100+i,_i I=20040r Ee=1.96 G = so Y* = 160 T = 65 i* = 4% 1M = 0.05Y 105 + 80E rte = 3% EX=Y*50E r=F+trr it = 2% i = r + are K = 1 r =? ? % Y* is foreign output. i* is the foreign nominal interest rate. NX = EX - IM E is the nominal exchange rate. equilibrium equation: Y= C + I + G + M S is savings. private saving Sp = Y - T - C government saving S5 = T - G S = Sp + SG I = S - NX Ination and interest rates are in percent units (e. g., enter 2, not 0.02). In this economy, investment (I) is 80, and net exports (NX) is equal to the government's budget decit (T - G). 1. Calculate the value of the real interest rate (r) and consumption (C) in this economy. (20 points) Given the values above, suppose foreign output (1\") rises by, say, ten or twenty percent, while private saving remains equal to investment (though both are now higher than before). 2. Show all this on m IS graph. [Label the graph clearly and completely] (22 points) Given the production function, Y = AKaLu'\") assume that a = 1/3. The labor supply equation is L5 = 60*w - R In TABLE ONE, column one represents a labor market in recession (disequilibrium). In column two, the adverse shock has ended and the labor market is in equilibrium. In column three, the recovery is " global" : expanding world trade has increased incentives for on-the-j ob search (OJ S) and for businesses to invest. 3. Complete TABLE ONE. [Round w and u to two decimal places] (2 points each) TABLE ONE (g) 5.5 6500 475 (h) (i) u 0.09 (1) 0.02 4. On one labor market graph, show each of the three columns above. In each case, label the unemployment. [Slopes never change. Label the graph clearly and completely.] (20 points) The questions above illustrate how a single economy (e.g., the United States) may be affected by the growth of other economies. 5. Complete TABLE TWO to show differences that might arise om rapid growth of the global economy (SCENARIO TWO) compared to a "homegrown" recover (SCENARIO ONE) in which global factors have less impact. The table shows the lower real interest rate in SCENARIO TWO and that the national debt is not different between the two scenarios. (2 points each) > lower (xiv), > higher (T), > no difference is implied by the scenarios = not different (ND), or > difference is implied, but not enough information (??). B is the national debt. SP TABLE TWO