For this question you will continue to use the above model, reproduced here : – = 5 + 0.01 – 10171 ,` Money demand [^ = 30 + 0. 518 – 71 – 2010…

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For this question you will continue to use the above model, reproduced here :”- = 5 + 0.01 – 10171 ,`Money demand[^ = 30 + 0. 518 – 71 – 2010 *^Desired consumption*$` = 401 – 20101 * *Desired investmentN` = 31 – 0.18 – 5 0Desired net exportsYou can assume that I” = 150 is the long – run Equilibrium level of output , that is ,*$”and that the initial price level [ P] is 1. 5 .* ] Suppose that the government decides to PEE the nominal exchange Le_ Jat DEOwhich is below its equilibrium value . Calculate the short – run as well as the long -run effects on output and the price level . Determine as well what would happento the real exchange rate in the short run and then the long run compared withthe value you found in Question 2 , part 2 ) .b) As economists in the Department of Finance , You advise the government that inthe long run , the policy of pegging the exchange rate will not have a lasting effecton `. That said , because it is below it’s equilibrium value , the short- run increasein demand does provide an opportunity to lower the fiscal deficit while keepingthe economy at full employment .1 ) USE in turn a cut in Gand then an increase in I to keep the economy at fullEmployment ( that is , cut G holding I constant , and then separately raise !”holding G constant , in each case by Enough to offset the expansionaryEffect of the devaluation ] .”2 ) Which policy results in the most improvement in the budget deficit ?Describe ( no calculations required ; the effects of each policy oncomponents OF ! “.3] Do the policies have different effects on the composition of demand (E.B .Consumption , investment and net exports ] ?”[ ] Start again with the conditions as they were in part & ] . Assume that the economyexperiences an increase in potential From }” = 150 to $” = 153. Use the model toFind the long – run effect of this change on the real exchange rate (E), net exportsI’MA] and consumption [0]. As well , Find the new level of the nominal moneysupply needed to maintain long – run Equilibrium . Did the nominal money supplyrise or fall ?” What has happened to the real money supply ?

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