Refer to the following model of the economy for Q5-Q8 (Same model but under fixed exchange rates) Consider the Mundell-Fleming short-run model of an open economy above, but now under fixed exchange rates given 1n equations (1)-(9) below. As before, we assume there 1s perfect capital mobility so that the domestic interest rate equals the world interest rate, i.e., r = r*. However, now the CB decides to fix the nominal exchange rate at e. (1)C = 600 + 06(Y-T) (2) I =550-40r 4G =570 (B5)T = 150+ 0.2Y (6) NX = 200- 15( P /P")e (HPE =C+ 1+ G+ NX (7YY =PE Goods market equilibrium d ) %= 15Y-50r mM* M it 9) T F Money market equilibrium Suppose that P =2. Also suppose that the foreign price P*= 1 while the world interest rate r* = 5. Professor Fanny Demers 3 March 31, 2024 5. Now, suppose that the CB sets e = 15. The equilibrium output level in this economy Y * is given by: (Hint: use the 1S* eq.) A) Y4 =2780.8 B) Y =1820.25 C) Y*=2105.78 D) Y=2265.6 6. Suppose again that the CB sets e = 15 . The CB will be obliged to alter the money supply (relative to its level of 6000 in the floating exchange rate case) in the following manner to maintain the exchange rate at e: A) Since e = 15 the CB will have to allow the money supply to decrease to 5500 units. C) The CB will not alter the money supply because it wants to maintain output constant. D) The CB can set the money supply to 7000 units because it wants to bring the economy closer to the full employment level. 7. Now, suppose instead that the CB sets e = 17.5 The equilibrium output level in this economy Y * is given by: A) Y4=2620.8 B) Yea=1987.9 C) Y4=2121.6 D) Y*=2370.5 8. Suppose again that the CB sets e = 17.5. Then, to maintain the exchange rate at e the CB will have to . (Hint: compare e with the equilibrium exchange rate you found in question 2.) A) absorb the foreign exchange paid by traders and pay them with domestic currency so that the CB's foreign exchange reserves rise but the domestic money supply decreases. B) absorb the foreign exchange paid by traders and pay them with domestic currency so that the CB's foreign exchange reserves rise and the domestic money supply M increases. C) pay traders out of foreign exchange reserves, and absorb the domestic currency, so that the CB's foreign exchange reserves fall and the domestic money supply M falls. D) pay traders out of foreign exchange reserves, and absorb the domestic currency, so that the CB's foreign exchange reserves fall and the domestic money supply M rises