Assume That the LM Curve for a Small Open Economy $L M$

question 68

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. a. Using the $L M$ 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 $N X$ ?
c. If this value of $N X$ is to be achieved, what must be the equilibrium exchange rate, $e$ ?

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Definitions:

Intra-entity Transfer

Transactions involving assets, services, or funds between units or divisions within the same legal entity.

Consolidated Income Statement

A financial statement that presents the overall income of a corporation and its subsidiaries as a single entity.

Deferred

In finance, this term refers to transactions or events that are postponed to a future date.

Consolidated Worksheet

A tool used in the preparation of consolidated financial statements, summarizing the financial positions and operations of a parent company and its subsidiaries.