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Discuss the extent to which the traditional approach is an adequate model of exchange rate determination.
a. Given that in an economy, , I, MS =300, Mt = 0.4Y, and Mz=125-200r. Calculate;
i. The equilibrium level of income and interest rate in this economy.
ii. The level of C, I, Mt, and Mz when the economy is in equilibrium
b. Now, assuming the economy is open with government (G) participation and external trade which is summarized as follows; export(X)= 100-0.10Y, import(M)=50, G=100, Taxes(T)= 100 and C, I, MS, Mt, and Mz the same as defined in (a) above. Calculate;
i. The equilibrium income and interest rate in this new economy.
ii. The level of C, I, Mt, and Mz when the economy is in equilibrium
iii. Assuming capital is perfectly mobile in this economy, graphically sketch the IS-LM-BOP frame work of this economy. Comment on the balance of payment situation in this economy.
iv. What exchange rate policy should government implement in (iii) to enhance income and why?
and
When there is excess demand, price adjusts according to the equation
Find the long run equilibrium price, P* (that is, the price at which there is no excess demand or supply).
Formulate and solve he first order differential equation giving P as a function of time, t. Is this market dynamically stable or unstable?
If the initial price is P = 50, how close will the price be to its long run equilibrium value, when t = 10?
If net investment is a constant flow at 0 (Ghana Cedis per year), what will be the total net investment (capital formation) during a year, from t = 0 to t = 1?
If (thousands of Ghana Cedis per year) – a nonconstant flow – what will be the capital formation during the time interval [1, 4], that is, during the second, third, and fourth years?
1. Discuss the extent to which the traditional approach is an adequate model of exchange rate determination.
and
When there is excess demand, price adjusts according to the equation
Find the long run equilibrium price, P* (that is, the price at which there is no excess demand or supply).
Formulate and solve he first order differential equation giving P as a function of time, t. Is this market dynamically stable or unstable?
If the initial price is P = 50, how close will the price be to its long run equilibrium value, when t = 10?
Use the following information (in rupees):
Income (Y) = 1,00,000
Nominal Money Supply (M) = 80,000
Price Level (P) = 20
Calculate the money growth rate required to finance the budget deficit of Rs.10,000 in an
economy.
