The Kingdom of dreamland was once a beautiful kingdom. It is a small open economy in the Long Run

It can be described as:

C = 25+0.92(Y-T)

Y=6755

G=164

T=104

I=1406-13r

NX=100-10e

r*=19 (you can thing of it as 19%, but use 19 in your calculations)

Today, when King Zog woke up, he was greeted by his advisor, Odval with some great news! The Kingdom of Dankmire (a much larger economy):

1. reduced the world rate r*=10.

1. Increased it's import of Dreamland purchases: NX= 200-10e. (the exports of Dreamland have increased)

2. Question 1 (4 points)

   Looking at the events individually - look at event 1 only.

   Which part of the small open economy model is impacting. In your answer, identify the initial impact and show the transmission to the final impact. (EX: if it impacts the consumption schedule, if it impacts goods and services, how does this impact? Y, C, S, I, r .

   In your answer, provide the status quo and the change brought in. numerical, diagrams and interpretation are required.

   Question 2 (3 points)

   Looking at the events individually - look at event 2 only.

   Which part of the small open economy model is impacting. In your answer, identify the initial impact and show the transmission to the final impact. (EX: if it impacts the consumption schedule, if it impacts goods and services, how does this impact? Y, C, S, I, r .

   In your answer, provide the status quo and the change brought in. numerical, diagrams and interpretation are required.

   Question 3 (3 points)

   Combine both impacts together and discuss and show using diagrams the final impact on ouptut and real exchange rate and all other aggregate variables.

   In your answer, provide the status quo and the change brought in. numerical, diagrams and interpretation are required.

   Should king Zog be happy? Explain your answer

   TIP: using a table to show all answers from status quo, question 1, question 2 and question 3, would be extremely useful for students in writing our their answers.