The ISLM-FX Model under Floating Rates

CASE A. Floating Rates:
restart;
MPC:=0.80; GOV:=1900; TR:=0.20;
MS:=5000; P:=100;
FP:=200; FY:=60000; FR:=0.06; 
FE:=0.50;
AD:={
 PC=MPC*(Y-NT),
 NT=TR*Y,
 GPI=2400-10000*IR,
 CA=300*ER*FP/P+0.02*ER*FY-0.1*Y,
 Y=PC+GPI+GOV+CA,
 MS/P=0.62*Y/P-200*IR, 
 IR=FR+FE/ER-1 
};
ADresult:=solve(AD, {Y, ER, IR, PC, GPI, NT, CA});
CASE B.  Floating Rates with permanent adjustment in exchange rates:
restart;
MPC:=0.80; GOV:=1900; TR:=0.20;
MS:=5000; P:=100;
FP:=200; FY:=60000; FR:=0.06;
AD:={
 PC=0.80*(Y-NT),
 NT=TR*Y,
 GPI=2400-10000*IR,
 CA=300*ER*FP/P+4*ER*FY/FP-10*Y/P,
 Y=PC+GPI+GOV+CA,
 MS/P=0.62*Y/P-200*IR, 
 IR=FR+FE/ER-1,
 FE=ER
};
ADresult:=solve(AD, {Y, ER, FE, IR, PC, GPI, NT, CA});
Variable Names:
Y - nominal Gross National Disposable Income
PC - personal consumption expenditures
GPI - gross private investment
GOV - government purchases
CA - current account balance
MPC - marginal propensity to consume
NT - net tax revenue

TR - tax rate
MS - money supply
P - price level
IR - interest rate
ER - exchange rate
FE - forward exchange rate 
FY - foreign nominal GDP
FP - foreign price level
FR - foreign interest rate
Assignment:

1)  Using Maple, solve for the above three models.  Because the system is nonlinear in some variables (i.e., the exchange rate ER), there may be more than one set of solutions, and you will need to pick the right set.  You will know which is which by the solution values.

First, solve for the initial equilibrium.  Then in each case:

Shock (a) - Increase GOV from 1900 to 2000.
Shock (b) - Increase MS from 5000 to 5500.
Shock (c) - Increase P from 100 to 110.
Shock (d) - Increase FP from 200 to 220.
Shock (e) - Increase FY from 60000 to 66000.
2)  In each of the above cases, explain your results with words and appropriate graphs (i.e., the ISLM-FX model), and explain the directional change of the main endogenous variables (Y, IR, ER, CA).  In which of the two cases (A, B) is the impact of each shock (a, b, c, d, e) greatest or least?