Question 2 (20 points) - Chapters 4 81 5 Home is a small open economy that can be described by the longrun classical model: Consumption: C = 11250 + 0.75(Y - T) - 2000r Investment: I = 16500 - 1500r Government spending: G = 12000 Net exports: N X = 5000 - 4400 8mm, 8mm = real exchange rate Money demand: L(r + 11?, Y) = 0.65Y - 200(r + 11:2) (Nominal) money supply: MS = 18000 Foreign price level: P1: = 1.5 World interest rate: rW = 6% Suppose the money supply in both the Home and Foreign countries has been growing by 5% per year for the past several years and this is expected to continue. Note: Both r and TEE are measured in percentage points (for example, if we find r = 10, then r is interpreted as being equal to 10%). Keep your answer to at least 4 decimal points. a) Initially, the government of Home runs a budget surplus of 3000 with an equilibrium (real) exchange rate is 1.25 FC per DC. Find the long-run equilibrium levels of output, national saving, net exports, and price level for Home. Find the equilibrium nominal exchange rate. (5 points) Home is initially in its long-run equilibrium as described in part (a). Suppose an unfavourable article appears in Consumer Reports magazine that is widely reported via other world news media. This article claims that the output (i.e. exports) of the Home country are not only over- priced low quality items, but given the lax production laws in the Home country they are often made of unsafe materials. The article also claims that having these items around one's home increases the chance of severe health problems. As a result Home's autonomous net exports changes by 22%. b) Find the new long-run equilibrium levels of output, national saving, net exports, price level, and real exchange rate. (5 points) c) Suppose politicians in the Home country find the change(s) in part (b) undesirable, and pressures to the government to permanently double the rate of growth of the money supply. Determine the resulting new growth rates of the real and nominal exchange rate for the Home country currency. Describe in words the impact this has on Home's net exports and level of output in longrun equilibrium. (5 points) d) Suppose instead, the changes of part c have n_ot occurred, but rather these news articles have not only caused Home's autonomous net exports to change by 22%, but it also causes Home's autonomous investment to rise by 20%, as factory owners realize they need to invest more in order to become competitive suppliers of safer products. Find the new longrun equilibrium levels of output, national saving, net exports, price level, and real exchange rate