DSE 2012

[SoniaKapoor]

Consider a small open economy with xed nominal exchange rate (E),
xed domestic price level (P) and fixed foreign price level (P*). Let e be the
corresponding real exchange rate. The goods market equilibrium condition is given by the following IS equation:
Y = C + I + G + X - IM/e

where
C = c0 + c1Y represents domestic consumption
I = d1Y - d2r represents domestic investment
G represents government expenditure
X = x1Y*- x2e represents export
Y*  represents income of the foreign country
IM = m1Y + m2" represents import

[SoniaKapoor]

Someone plss help me out...

[L14]

Hi Sonia, I don't know how to solve 57, but may I ask here about 58,59,60 too.
58: how is the answer positively sloped? if M-L condition is satisfied, NX dec as ε inc => Y dec as ε inc.
 shouldn't the ans be (b)

59: I'm not getting this too
r=r* + (εe - ε)/ε
as r is inversely related to ε, as ε increases, I increases( so Y increases) but NX dec(so Y dec). how is it negatively sloped irrespective of M-L condition. If M-L fails, I increases irrespective of it => Y increases

60: I get the same answer. But please correct if my reasoning is right. As G inc, r inc , so ε dec(as ε and r are inversely related). Similarly M inc, r dec, ε inc.

[L14]

kangkan,arushi,ron,rajeco,atika, vandita somebody help with 57 to 60!!!!...attaching the qn paper for referance
Attaching the 2012-Option-A.pdf

[RajEco]

Rough solution to prob 57.


I cudn solve for 58 and 58 through the model. can seniors help ?