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t1 2. World Interest Rates Going Up. Marks: 4. Consider the following open New Keyne- sian economy t (e Et [fe41]) (it Et [+]) + E{[t+1], Et *+ [] Ut, we = BEt [+1] +t By Et [At+1] + YAt, 1 x = Ex [*c+1] > (i Et [::]) YE, [A$:+1] +us, at o = where x = 00+ (1 - Y) (0 - 1), = (a + b), oa = = a = -Br), and = (0 + 6) (1-x)(1+B6) 1-Y+74 At = t t-1. Suppose that world nominal interest rates to increase by 10 percent, i.e. = 0.10. Suppose the economy goes back to steady state in just one period. Let B = 0.90, o = 2,4 = 1, 0 = 4, and k = 0.25. For an open economy one with v = = 0.5, consider two possible scenarios: (i) the interest rates at the local economy are stuck at the zero lower = bound and do not respond t = 0 and (ii) the interest rates increase by 5 % t = 0.05. For both scenarios, calculate t, t and . Explain your results briefly. t1 2. World Interest Rates Going Up. Marks: 4. Consider the following open New Keyne- sian economy t (e Et [fe41]) (it Et [+]) + E{[t+1], Et *+ [] Ut, we = BEt [+1] +t By Et [At+1] + YAt, 1 x = Ex [*c+1] > (i Et [::]) YE, [A$:+1] +us, at o = where x = 00+ (1 - Y) (0 - 1), = (a + b), oa = = a = -Br), and = (0 + 6) (1-x)(1+B6) 1-Y+74 At = t t-1. Suppose that world nominal interest rates to increase by 10 percent, i.e. = 0.10. Suppose the economy goes back to steady state in just one period. Let B = 0.90, o = 2,4 = 1, 0 = 4, and k = 0.25. For an open economy one with v = = 0.5, consider two possible scenarios: (i) the interest rates at the local economy are stuck at the zero lower = bound and do not respond t = 0 and (ii) the interest rates increase by 5 % t = 0.05. For both scenarios, calculate t, t and . Explain your results briefly

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