dse 2007 q39

[tim]

hey cn u temme wats the relevance of exchange rate as unity here...
i solved the question in regular fashion and got values as
Y1 = 2096
Y2 = 662.5

but dint get this line...and also how to decide upon the surplus or deficit ?

[tim]

http://economicsentrance.weebly.com/lessons.html

q39 of 2007

[AJ]

me too stuck at same problem.
but I am getting Y1= 1000
                       Y2= 620

and acc. to answer key.. Y1<Y2 ......????

Someone please tally answers for this one..!!!!!!!

[Chinni18]

I tried doing Y1=200+0.5(Y1-0.4Y1)+250+114+M2-40-0.05Y1

And Y2=200+0.5(Y2-0.4Y2)+250+120+M1-40-0.3Y2

This is because 1's exports are 2's imports and vice versa, which is why exchange rate has been mentioned as unity i.e. we can directly look at M1 and M2.

Solving, I got:
Y1=940.34, Y2=650.08, M1=120.08 and M2=181.25
So country one does have a surplus but the level of income is not greater than country 2.
I don't get it.

[aditi5000]

i'm also getting y1= 1000 and y2= 620...
And country 1 runs a surplus of 136 and country 2 runs a deficit of the same amount.. So option c seems right!!! It HAS to be a trade surplus for sure for country 1 because MPM of country 2 is A LOT higher than MPM of country 1 and autonomous imports are equal so they get cancelled out. SO that narrows down to just the equilibrium output - option C OR D??

[aditi5000]

Chinni check your calculation, the 2 simultaneous equations should be

Y1=200+0.5(Y1-0.4Y1)+250+114+{x-m = 40 + .0.3 Y2 - 40 - 0.05 y1}

And Y2=200+0.5(Y2-0.4Y2)+250+120+{40 + 0.05 y1 - 40 - 0.3 y2}

exports depend on foreign country, imports are internal income dependent

[Chinni18]

Oh you're right, made a very stupid error. Yes even my answer is now the same. Thanks  I think C has to be the right answer because country 1's output is definitely higher, isn't it?

[AJ]

yup, so answer has to be C and not D! right?

@amit sir, please confirm this.

[Amit Goyal]

Thats right (c) is correct.

[Chinni18]

Thank you Amit sir

[tim]

thnk u :) got it

[Chinni18]

Hey tim, you were asking the relevance of exchange rate as unity. Well, when exchange rate is unity and Marshall Lerner condition holds, then interest parity requires that the interest rates be equal in both countries.

[tim]

ok thnk u chinni :)