Question 1. (9 marks) Consider the following model of a small open macroeconomy: Production and Labour Market: Y=70N2N2Nd=60PWNs=0.5PWNd=Ns=N (1) Production function (2) Labour demand (3) Labour supply (4) Labour market equilibrium Goods Market: C=149+0.75YD (5) Consumption function I=75+0.2Y200i (6) Investment function G=165 (7) Government expenditure YD=YT (8) Disposable income T=Y/3 (9) Tax function NX=1000.1Y+e/P (10) Net exports function Y=C+I+G+NX (11) Goods market equilibrium Money Market: L=100+0.2PM (12) Money demand L=PM (13) Money supply (14) Money market equilibrium Balance of Payments: i=if=0.05 BP=0 locus Based on the above information, answer the following questions. a) (3 marks) If the price level ' P ' is fixed at P=P=1, and the exchange rate is fixed at e=e=1, what are the equilibrium values of Y and M ? b) (3 marks) If the price level P is fixed at P=P=1.05, the money supply is fixed at M=M=346.605 but the exchange rate ' e ' is flexible, what are the equilibrium values of Y and e ? c) (1 mark) Suppose that the price level is fixed at P=P=1 in the short run, but both ' P ' and the nominal wage W are flexible in the long run. What is the equilibrium value of Y in the long run? d) (2 marks) Assume there is an energy price shock in the global economy due to political instability in Europe and the price level has increased. To deal with higher inflation, the RBA reduced money supply. Further assume that the exchange rate is flexible. Illustrate the effects of this policy change using an appropriate diagram. Explain briefly. Question 1. (9 marks) Consider the following model of a small open macroeconomy: Production and Labour Market: Y=70N2N2Nd=60PWNs=0.5PWNd=Ns=N (1) Production function (2) Labour demand (3) Labour supply (4) Labour market equilibrium Goods Market: C=149+0.75YD (5) Consumption function I=75+0.2Y200i (6) Investment function G=165 (7) Government expenditure YD=YT (8) Disposable income T=Y/3 (9) Tax function NX=1000.1Y+e/P (10) Net exports function Y=C+I+G+NX (11) Goods market equilibrium Money Market: L=100+0.2PM (12) Money demand L=PM (13) Money supply (14) Money market equilibrium Balance of Payments: i=if=0.05 BP=0 locus Based on the above information, answer the following questions. a) (3 marks) If the price level ' P ' is fixed at P=P=1, and the exchange rate is fixed at e=e=1, what are the equilibrium values of Y and M ? b) (3 marks) If the price level P is fixed at P=P=1.05, the money supply is fixed at M=M=346.605 but the exchange rate ' e ' is flexible, what are the equilibrium values of Y and e ? c) (1 mark) Suppose that the price level is fixed at P=P=1 in the short run, but both ' P ' and the nominal wage W are flexible in the long run. What is the equilibrium value of Y in the long run? d) (2 marks) Assume there is an energy price shock in the global economy due to political instability in Europe and the price level has increased. To deal with higher inflation, the RBA reduced money supply. Further assume that the exchange rate is flexible. Illustrate the effects of this policy change using an appropriate diagram. Explain briefly
