ECO102 Tutorial 11

ECO102 - Week 11.pdf

• 1
  • $C=28+0.9(Y-20-0.1Y)$
  • $I=44-2R$
    • This is the difference by using IRP model
  • $G=20$
  • $G_1=50$
  • $NX=60-0.01Y-0.2P+e$
    • $e$: exchange rate.
  • $AS=2P$
  • $MD=0.05Y-R$
  • $MS=8$
  • $E=34-2R$
    • Exchange rate as a function of interest rate.
  • This contains basically everything we've learnt through the course.
  • Bundles A,B,C,E,F
  • Calculate $y,p,e,r$
  • Preliminary step
    • Convert $AS=2P$ and find out price.
      • $AS=2P$
      • $Y=2P$
      • $P=\frac{Y}{2}$
    • Find what $R$ is.
      • $MS=MD$
      • $8=0.05Y-R$
      • $R=0.05Y-8$
      • $R=0.1P-8$
    • Now we can find out what investment is.
      • $I=44-2R$
      • $I=44-(2)(0.05Y-8)=60-0.1Y$
      • $I=60-0.2P$
    • Also Exchange Rate
      • $E=34-2R$
      • $E=34-(2)(0.05Y-8)=50-0.1Y$
      • $E=50-0.2P$
    • Plug in $E$ into $NX$
      • $NX=60-0.01Y-0.2P+e$
      • $NX=60-0.01Y-0.2P+(50-0.1Y)=-0.2P-0.11Y+110$
      • $NX=-0.2P-0.11Y+110$
      • Plug in $P$
      • $NX=-0.2\left(\frac{Y}{2}\right)-0.11Y+110=110-0.21Y$
      • $NX=110-0.21Y$
      • $NX=110-0.42P$
  • Condense Consumption Function:
    • $C=28+0.9(Y-20-0.1Y)=0.81Y+10.0$
  • Bundle A:
    • We can't just immediately calculate AE and AD and AS, etc.
    • Because we substituted $P$ and $I$ and $E$, etc.
    • It's a Fake AE curve.
      • $AE=C+I+G+NX$
      • $AE=0.81Y+10.0+60-0.2P+20+110-0.21Y=-0.2P+0.6Y+200.0$
      • $AE=-0.2\frac{Y}{2}+0.6Y+200.0=0.5Y+200.0$
      • $\frac{AE}{45}$
        • $Y=0.5Y+200$
        • $Y=400.0$
        • $⟹P=200$
      • $R=0.05(400)-8=12.0$
      • $E=34-2R=34-24=10$
      • $I=44-2R=44-24=20$
      • $I=60-0.2P=60-40=20$
      • $I=60-0.1Y=60-40=20$
    • Real AE
      • $AE=C+I+G+NX$
      • $AE=0.81Y+10.0+20+20+60-0.01Y-0.2P+10=-0.2P+0.8Y+120.0$
      • $AE=-0.2P+0.8Y+120.0$
      • $AD$
        • $Y=-0.2P+0.8Y+120$
        • $Y=600-P$
  • Bundle C:
    • Sticky Wages like in earlier units. Interest Rates are now sticky.
    • $AE=C+I+G+NX$
    • $AE=10+0.81Y+20+50+60-0.01Y-0.2P+10=-0.2P+0.8Y+150$
    • $AE=-0.2P+0.8Y+150$
    • $AD$
      • $Y=-0.2P+0.8Y+150$
      • $Y=750-P$
    • $AS=AD$
      • $Y=2P$
      • $2P=750-P$
      • $P=250⟹Y=500$
  • Bundle B:
    • Take same AE as C but with prices constant from A.
    • $AE=-0.2P+0.8Y+150$
    • $AD=750-P$
    • A's price is $200$.
    • $AD(200)=750-200=550$
    • $(550,200)$
  • Bundle E:
    • Flexible Exchange Rates.
      • Dampen or extrapolate shocks.
    • We have to recreate a Fake AE curve.
      • $AE=10+0.81Y+60-0.1Y+50+110-0.21Y=0.5Y+230$
      • $AE=0.5Y+230$
        • $Y=0.5Y+230$
        • $Y=460.0$
        • $⟹P=\frac{Y}{2}=230$
      • R:
        • $R=0.05(460)-8=15.0$
      • E:
        • $E=34-2R=34-30=4$
      • I:
        • $I=44-2R=44-30=14$
      • NX:
        • $NX=60-0.01Y-0.2P+E=60-4.6-46+4=13.4$
    • Real AE:
      • $AE=10+0.81Y+14+50+60-0.01Y-0.2P+4=-0.2P+0.8Y+138$
      • $AE=-0.2P+0.8Y+138$
      • $AD$
        • $Y=-0.2P+0.8Y+138$
        • $Y=690-P$
      • $AS=AD$
        • $Y=2P$
        • $2P=690-P$
        • $P=230⟹Y=460$
    • This has its own demand curve, because of the change in exchange rate.
      • $AD=690-P$
      • $AD(200)=690-200=490$
      • $(490,200)$
  • Bundle F:
    • Fixed Exchange Rates and Interest Rates from A.
    • So $R=12$ and $E=10$.
    • This gives us bundle C. Because bundle C is sticky interest rates.
    • If it's a change in $G$, then point C=F.
    • F is different if we have affects to money supply / demand.
    • Fixed:
      • $\hat{r}=12$
      • $\hat{e}=10$
    • $AE=10+0.81Y+20+50+60-0.01Y-0.2P+10=-0.2P+0.8Y+150$
    • $AE=-0.2P+0.8Y+150$
      • $AE=-\frac{0.2Y}{2}+0.8Y+150=0.7Y+150$
      • $Y=0.7Y+150$
      • $Y=500⟹P=250$
• 1: Fixed exchange rates amplify shocks.
• 2: When aggregate supply curve is elastic
• 3: When money demand is elastic with respect to changes in interest rates.
• 4: When the MPI is low