Econ 476 Assignment 1

Econ 476 Assignment 1

ECON 476v7

Assignment 1

Assignment 1 is worth 15% of your final grade and should be done after you have completedUnits 1 through 5. Read the requirements for each question and plan your responsescarefully. Answer all five questions.

Although your responses should be concise, ensure that you answer all portions of each

question completely. The objective of this assignment is for you to synthesize the material

presented in Units 1 through 5, and to consider each question rationally and logically.

1. Use the IS/LM/BP model to illustrate and explain how the degree of capital mobility

affects fiscal policy under fixed exchange rates.

2. Suppose that you observe the following exchange rates:

$2/£; $.0075/¥; and £.005/¥.

Is there cross-rate equality? If yes, why? If not, what would you expect to happen?

3. If you wanted to assess the competitiveness of a country, would you focus on its spot

exchange rate, its real exchange rate, its effective exchange rate, or some other

measure of the country’s currency’s value? Explain.

4. Using the IS/LM/BP model and assuming perfect capital mobility, explain:

a. how an increase in foreign income affects domestic output.

b. how a devaluation of the domestic currency affects domestic output.

5. Consider the following Keynesian income model:

E = C + I + G + X-M

C = 215 + 0.82Yd

Yd = Y – T

T = 60 + 0.33Y I = 400

G = 620

X = 310

M = 50 + 0.20Y

In equilibrium, Y = E:

a. calculate the equilibrium level of income.

b. calculate the amount of taxes collected when the economy is at equilibrium level

of income and show whether the government budget is in surplus or deficit.

c. calculate the value of net exports when the economy is at equilibrium level of

income.