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Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r – 200 + 2(M/P), while the IS curve is Y = 400 + 3G – 2T + 3NX – 200r. The function for NX is NX = 200 – 100e, where e is the exchange rate. The price level (P) is fixed at 1.0. The international interest rate is r * = 2.5 percent.

Using the LM curve, find the equilibrium level of Y in the small open economy, if M = 100

My question is,how do i find the equilibrium Y given that I don't have the values of G and T?

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  • $\begingroup$ You are given way more information than you need to answer the question. Just forget about the IS curve, basically. $\endgroup$ – Regio Apr 22 '19 at 2:46
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I cannot post this as a comment but the question you are asked is to find the equilibrium Y using the LM curve. All the information is given to you here, $M = 100, P = 1, r= 0.025$. This will give you the equilibrium level of $Y$. Think of it this way, the LM curve and the information you are provided gives you the level of $Y$ in this economy, then for an equilibrium $G$, $T$ and $e$ will have to be determined "residually" to satisfy this level (this does not preclude that the exchange rate is determined endogenously given a floating exchange rate regime).

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