Question 2 (30 points) - Chapters 4, 5, 6 & 7 Suppose the world consists of only one pair of open economies, country A and country B, and these countries o_nly trade with each other. Country A only produces food whose output is measured in standard units, where one unit of YA is equal to 250 kilograms of food. Country B only produces clothing in stande units, where one unit of Y3 is equal to 10 kilograms of clothing. The table below provides some selected information about the economies of these countries. Keep your answers to at least 4 decimal places. Country A Production function: YA = 3xKD'50L0'50 Capital stock: K : 500 Labour supply: L = 500 Consumption function: C = 150 + 0.5(Y-T) Investment function: I = 804 - 80r Gov't sector: G = 100 & T = 100 Net ex ort function: NX : 841 9753 Monetary sector: Country B Production function: Y3 = KO'SDLO'SO Capital stock: K : 850 Labour supply: L = 850 Consumption function: C = 110 + 0.65(Y-T) Investment function: I: 150 - 90r Gov't sector: G = 110 & T = 110 Net ex ort function: NX : 748 614 1/3 Monetary sector: d M d Real money demand = [?]Z 0.8Y 100r J = 0.9Y 200r P Real money demand = [ Nominal price level = 1 Nominal price level = l Use the long-run classical model of an open economy to answer the following questions. Both countries have perfect nancial capital mobility and no risk premium. Hint: Since there are only two open economies, both are large open economies. a) Determine the long-run equilibrium level of food and clothing production. (4 points) h) Suppose absolute purchasing power parity holds for these countries. For each count_ry, determine the long-run equilibrium levels of: o The trade balance; The domestic nominal money supply; The real exchange rate (in the usual orientation # of foreign per domestic, Ercmc); The nominal exchange rate (in the usual orientation of # of foreign currency per domestic currency); The domestic real rate of interest; The real wage rate of labour and real rental rate of capital; The unemployment rate; and Output per worker. Support your answer with one set of diagrams, one for the (Country A) loanable funds market and one for the (Country A) foreign exchange market. Which country has a better standard of living? (1 1 points)