Dornbusch model under perfect foresight

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Reference no: EM13948412

Consider the following Dornbusch model under perfect foresight

e = 0.75y + 2.5 + 0.02(s - p)

p = 0.2(e - y)

md = p + 0.75y - 0.2r md = ms = 155

r = r* + se se = s

y = 10, r* = 12.5

(i) What is the equilibrium exchange rate and price of this system?

(ii) Set up the system on a spreadsheet.

(iii) Let the money supply fall from 155 to 152 in period 1. Plot the trajectory of the economy.

Reference no: EM13948412

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