Assume That the LM Curve for a Small Open Economy

question 36

Essay

Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r - 200 + 2 (M / P), while the IS curve is Y = 400 + 3G - 2T + 3NX - 200r. The function for NX is NX = 200 - 100e, where e is the exchange rate. The price level (P) is fixed at 1.0. The international interest rate is r^* = 2.5 percent.
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a.Using the LM curve, find the equilibrium level of Y in the small open economy, if M = 100.
b.Given this value of Y, if G = 100 and T = 100, what must be the equilibrium value of NX?
c.If this value of NX is to be achieved, what must be the equilibrium exchange rate, e?

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