1Questions to Be PreparedLet us consider an open economy which has removed all barriers to capital mobility. The openeconomy comprises three agents: households, firms and a government (which includes monetaryauthorities). We denote GDP by Y, the domestic interest rate by r, the exchange rate (i.e., thepound sterling price of one euro) by e (a rise in e means a depreciation of the pound sterling), andby r* the world interest rate. Prices are fixed and normalized to unity. The economy is describedby the following equations:CC(Y-T), 0 0, NXy < 0,MDL (Y,r), Ly>0, Lr <0,MS =M + H₂CI = CI (r-r*), CI, > 0,(la)(1b)(1c)(1d)(le)(1f)(1g)(1h)where a bar indicates that the variable is exogenous; C and G are final consumption expenditureby households and the government, respectively, T are lump-sum taxes, I stands for invest-ment (i.e., gross fixed capital formation), NX net exports (i.e., exports, EX(e), less imports,e .IM*(e,Y), expressed in local currency, say pound sterling), MD and MS are money demandand supply; money supply MS = M + H includes an exogenous component, M, and an endoge-nous component H = ARES which is the change in international reserves; in a floating exchangerate regime, H = 0; CI are capital inflows defined as investment less savings; if CI > 0, it meansthat the country sells more domestic assets than it purchases foreign assets and thus experiencescapital inflows; if CI < 0, it means than the country purchases more foreign assets than it sellsdomestic assets and thus experiences capital outflows. A rise in r makes domestic assets profitableand thus leads to capital inflows.1. Which condition implies that an exchange rate depreciation produces an increase in netexports? Explain.12. Comment equations (1).3. Derive the slopes of the IS-, LM-, and BP-schedule in the (Y,r)-space. Develop intuitionabout their pattern. Note: for simplicity purposes, we assume that net exports is a goodapproximation of the current account.

Given information C=c(Y-T) I=Ir G=G T=T NX=nx(e,Y) Ml(r,Y) Ms=M+H CI=(r-r*)

Let us consider an open economy which has removed all barriers to capital mobility. The open economy comprises three agents: households, firms and a government (which includes monetary authorities). We denote GDP by Y, the domestic interest rate by r, the exchange rate (i.e., the pound sterling price of one euro) by e (a rise in e means a depreciation of the pound sterling), and by r* the world interest rate. Prices are fixed and normalized to unity. The economy is described by the following equations:

Let us consider an open economy which has removed all barriers to capital mobility. The open economy comprises three agents: households, firms and a government (which includes monetary authorities). We denote GDP by Y, the domestic interest rate by r, the exchange rate (i.e., the pound sterling price of one euro) by e (a rise in e means a depreciation of the pound sterling), and by r* the world interest rate. Prices are fixed and normalized to unity. The economy is described by the following equations:

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter23: The International Trade And Capital Flows

Section: Chapter Questions

Problem 46P: Imagine that the economy of Germany finds itself in the following situation: the government budget...

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