This question explores IS and FX equilibria in a numerical example.

1. The consumption function is C = 1:5 + 0:75(Y - T). What is the marginal propensity to consume MPC? What is the marginal propensity to save MPS?

2. The trade balance is T B = 5(1-1/E)-.25(Y-S). What is the marginal propensity to consume foreign goods MPC_F? Given your answer to (2.1), what is the marginal propensity, to consume home goods MPC_H?

3. The investment function is I = 2 - 10i. What is the investment when the interst rate i is equal to 0.1 (10%).

4. Assume government spending is G. Add up the four components of demand and write down the expression for D.

5. Assume the forex market equilibrium is given by i = ((i/E) - 1) + .1, where the two foreign return terms on the right are expected depreciation and the foreign interest rate. What is expected exchange rate?

6. Solve for the IS curve: obtain an expression for U in terms of i, G, and T (eliminate E).