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This question explores IS and FX equilibria in a numerical example.
1. The consumption function is C = 1:5 + 0:75(Y - T). What is the marginal propensity to consume MPC? What is the marginal propensity to save MPS?
2. The trade balance is T B = 5(1-1/E)-.25(Y-S). What is the marginal propensity to consume foreign goods MPC_F? Given your answer to (2.1), what is the marginal propensity, to consume home goods MPC_H?
3. The investment function is I = 2 - 10i. What is the investment when the interst rate i is equal to 0.1 (10%).
4. Assume government spending is G. Add up the four components of demand and write down the expression for D.
5. Assume the forex market equilibrium is given by i = ((i/E) - 1) + .1, where the two foreign return terms on the right are expected depreciation and the foreign interest rate. What is expected exchange rate?
6. Solve for the IS curve: obtain an expression for U in terms of i, G, and T (eliminate E).
Compute the implied arc price elasticity of demand. Is a further price decrease warranted.
Use the Heckscher-Ohlin factor proportions framework with 2-factors, skilled and unskilled labor, to estimate the following arguments.
Write each production function given below in terms of output per person y a Y/L and capital per person k K /L. Plot these per person versions in a graph with y on the vertical axis and k on the horizontal axis.
Suppose demand function has changed t0o Qd2 = 14-P. What is the new equilibrium price and quantity. Show your work
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1? Ignore any actions the bank might take as a result of the withdrawal.
ACME Corporation consists of 250 grocery stores throughout the Midwest. At the starting of 2008 its statement of net worth showed the following data,
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After a decade long advertising war, NIK and REB are only two surviving company in the sport shoe market. The yearly demand in this market is given through P=100-0.5q.
What must the CFO expect about the Australian Dollar/US$ exchange rate 1 year from now if she chooses to invest in the US $ CD's instead of the Australian CD's?
If you need a rate of return. Illustrate what is the highest price I should be willing to pay for this stock.
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