ECON 2450 Study Guide - Midterm Guide: Indirect Utility Function, Utility Maximization Problem, Utility
11 Dec 2012
School
Department
Course
Professor
Document Summary
Note: unless otherwise explicitly stated, for full mark you must show how you arrived at your answer: the is*-lm* model [4 marks] Consider the is*-lm* model, which describes a small open economy. The exchange rate, denoted e, is the amount of foreign currency, say =y (japanese yen), that one must pay to buy one unit of the domestic currency, say $. Let pf be the price of foreign goods, and. To the domestic consumer the price of a foreign good in terms of the domestic currency is pf =e. Thus, the general price level in $ in the domestic country, p , is given by. The domestic interest rate is (cid:133)xed and equal to the exogenous world interest rate, r(cid:3). Demand for real money balances is given by l(r(cid:3); y ), where: The equation for the lm* curve is m=p = l(r(cid:3); y ), that is: M (cid:21)pd + (1 (cid:0) (cid:21)) pf e.
