Problem 2 (30 points) Consider the following small open economy: C 200+0.69Y 1 = 80-1,000r G = 20 85-0.09Y - e e = 90 M = 115 YL = 0.5Y-200r Y = 300 C is consumption spending, I is investment spending, r is the interest rate, G is govern- ment spending, NX is net exports, e is the nominal exchange rate, M is money supply, YL is demand for money, and Y is long-run output. In this economy, the interest rate does not deviate from the foreign interest rate. The price level is fixed and set to one. Note that, in this problem, a decrease in e is synonymous with a depreciation of the nominal exchange rate. 3 1. Assuming that the economy is in equilibrium, find the value of the interest rate. (6 points) 2. Going from the equilibrium found in Question (1), assuming fixed nominal exchange rates, what is the effect on domestic output if the foreign interest rate increases by 0.05? (6 points) (a) What is the size of the nominal money supply in the new short run equilibrium? (6 points) 3. Going from the equilibrium found in Question (1), assuming flexible exchange rates, what is the effect on domestic output if the foreign interest rate increases by 0.05? (6 points) (a) What is the value of the real exchange rate in the new equilibrium? (6 points) NX