#508 This question explores IS and FX equilibria

This question explores IS and FX equilibria - Economic

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This question explores IS and FX equilibria in a numerical example.

The consumption function is C = 1.5 + 0.75(Y - T).

The trade balance is TB = 5(1 - 1/E ) - 0.25(Y - 8)

The investment function is I = 2 - 10i

Assume government spending is G

1. Assume foregin exchange market equilibrium is given by i = ( 1/E - 1)+0.10 where the two foreign return terms on the right are expected depreciation and the foreign interest rate. What is the foreign interest rate? What is the expected future exchange rate?

2. Solving for the IS curve, obtain an expression for Y in terms of i, G, and T (eliminate E).

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