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Y = Yf= 100 D = 10 +10E ∙ P*/P + 0.4(Y‒T) +I+G I = 15...

Y = Yf= 100
D = 10 +10E ∙ P*/P + 0.4(Y‒T) +I+G
I = 15
G  = 30
T = 25
P* = 1.0
Md/P = 0.01Y/R
MS = 40
R* = 0.02

Calculate the long-run equilibrium price level (P) and the long-run equilibrium exchange rate (E) for this economy.

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Answer #1

By market clearing condition in goods market we have, demand for goods= supply of goods.

i.e.

From the market clearing conditions in money market, we have

So E=0.8*1.5=1.20

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