Answer to Question #210327 in Macroeconomics for Chilu

Question

Consider a Neoclassical model of an economy affected by the COVID-19 Pandemic. Use the 

information given below to answer the following questions:

Production function Y = 10√𝐾𝐿 

K = 100 , L = 25 (capital and labour)

r = 5% (domestic interest rate)

P = 100 (Domestic price level), P* = 110 (foreign price level)

M = 1000 (supply of money)

C = 75 + 0.5(Y-T)

I = 150 – 4r

G = 50, T = 50

Nx = 50 – 2E

Where E represents real exchange rate and e represents nominal exchange rate.

i) Calculate this economy’s trade balance and show it on a savings-investment diagram

ii) Calculate the net capital outflow, real and nominal exchange rate

iii) Due to the global pandemic of COVID-19, many workers die and the labour force 

reduces to 16. Calculate the new trade balance and real exchange rate.

iv) Assuming a constant velocity of money, by how much should this economy’s central 

bank adjust money supply to achieve its target of 0% inflation given the COVID-19 

pandemic?

Answer 1

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