ECON 2450 Department of Economics
Intermediate Macroeconomic Theory II York University
Instructor: Sharif F. Khan Summer 2 2013
Assignment 2 (OPTIONAL)
Total Marks: 25
Read each part of the question very carefully. Show all the steps of your calculations to
get full marks.
B1. (5 marks)
Consider two hypothetical countries: Home and Foreign. Home makes ordinary soap bars
that are sold for 5 dollars each. Foreign makes deluxe soap bars that are sold for 100 yens
each. The real exchange rate between Home and Foreign is a half of the deluxe soap bar
per ordinary soap bar.
(i) What is the nominal exchange rate between the Home dollar and the Foreign
(ii) During the following year, Home has 10% domestic inflation and Foreign has
20% domestic inflation. The real exchange rate remains unchanged. At the end of
the year, what has happened to the nominal exchange rate? Which country has
had a nominal appreciation? Which has a nominal depreciation?
Page 1 of 2 Pages B2. (20 marks)
Consider the following Keynesian small open economy:
Desired Consumption: C = 200+0.6 Y −T −200r
Desired Investment: I = 300−300r
Government Purchases: G =152
Taxes: T = 20+ 0.2Y
Net Exports: NX =170 −0.08Y − 0.5e