***Please answer part c and d, I have already answered and provided the answer for part b***

Question 2: IS-LM model in an open economy with flexible exchange rates (35 Marks)

The following equations are those for a small, open economy, which takes the world real rate of interest ( r w ) as given. In particular:

M/P = 24+0.8Y - 400r^w Money market equilibrium

C^d = 2+0.8(Y -T)-200r^w Desired consumption

I^d = 30-200r^w Desired investment

NX^d = 24-0.1Y -2e Desired net exports

Y = C^d + I^d +G+ NX^d Goods market equilibrium

b)You are given the following values for various variables: r w = 0.05; M/P = 100; G = 10 and the budget is balanced. Using the model, find the values for Y, e and the components of demand. Verify that the values you found for consumption, investment satisfy the goods market equilibrium condition, given the value of G. Finally, suppose that the nominal exchange rate ( enom ) is 0.8 and the foreign price level ( PFor ) is 1.0. Use this information to find the domestic price level and the nominal value of the money supply (M).

SOLUTION TO B:

C = 2 + 0.8 (Y- 10) - 200 x0.05

C = 2 + 0.8Y - 8 - 10 = 0.8Y - 16

I = 30 - 200x 0.05

I = 20

M/P = 100 = 24 + 0.8Y - 400r

100 - 24 + 400x0.05 = 0.8Y

Y = 96/0.8

Y = 120

C = 0.8x120 - 16

C = 80

NX = Y- C - G -I

NX = 120 - 80 - 10 - 20

NX = 10

NX = 24 - 0.1Y - 2e

10 = 24 - 0.1x120 -2e

2e = 12-10

e = 1

Therefore, y=120, c=80, g=t=10, i=20, nx=10, rw=0.05, and e=1

c) Suppose that the foreign price level ( Pfor ) rose from 1 to 1.25: you can think of this as a foreign inflation shock. What would happen to the economy in the short and long run? Would the domestic price level be affected? What would happen to the component of demand?

d) Assume again that the foreign price level is back at its initial level of 1. Suppose now that the government, worried about its debt levels, decides to raise taxes (T) from 10 to 11 or to lower spending (G) for 10 to 9. Use the model to determine what happened to consumption, the nominal and real exchange rates, and net exports in each case. For households, interested in maintaining their consumption levels, which option would be preferred?

(can you please give more detail about what information is needed? I have provided the questions and the answer to the first so it is easier to answer the following questions. Thank you so much for your help I am just unsure what else you need?)