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Question 2 (30 points) Topics 3, 4 8.: 5 Suppose the world consists of only one pair of open economies, country A and country B,

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Question 2 (30 points) Topics 3, 4 8.: 5 Suppose the world consists of only one pair of open economies, country A and country B, and these countries m 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 standard 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 Country B Production function: YA = 3XK0'50L0'50 Production function: Y3 = KO'SOLO'50 Capital stock: K = 500 Capital stock: K = 850 Laboursunl :L=500 Laboursuul :L=850 Consumtion function: C = 150 + 0.5 T Consumtion function: C = 110 + 0.65 T Investment function: I = 804 80r Investment function: I = 150 90r Gov't sector: G = 100 & T = 100 Gov't sector: G = 110 & T = 110 Net exort function: NX = 841 9752 Net exort mction: NX = 748 614 lfs Monetary sector: Monetary sector: Real money demand = L(r, Y) = 0.8Y lOOr Real money demand = L(r, Y) = 0.9Y 200r Nominal price level = 1 Nominal price level = 1 Use the long-run classical model of an open economy to answer the following questions. Both countries have perfect financial capital mobility and no risk premium. Also, expected inflation is zero in both countries. Note: 0 Interest rates, i and r, are expressed in percentage points, i.e., if r = 7.5, then r = 7.5%. 0 Since there are only two open economies, both are large open economies. 0 Think about what holds true when we add up all countries' net exports together. a] Determine the long-run equilibrium level of food and clothing production. (4 points)

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