814 STRATEGIC TRADE POLICY Suppose a given countrys domestic

8.14. STRATEGIC TRADE POLICY. Suppose a given country\'s domestic market is supplied by two firms competing a la Cournot: Firm 1, a domestic firm, and Firm 2, a foreign firm Demand is given by p-a Q, where Q is total output, and marginal costs by c? and C2, where we assume ci

Solution

Answer:

A) 2007: MV = PY (equation of exchange),

where P = ?, M = 1000, V = 8, and Y = 12,000.

1000*8 = 12,000*P
Therefore P = 8,000/12,000 = 2/3 = 0.67 (Price level 2007)
2008: MV = PY (equation of exchange), where P =?, M = 1050, V = 8, and Y = 12,000.

1050*8 = 12,000*P

Therefore, P = 8,400/12,000 = 0.70 (Price level 2008)
Inflation from 2007 to 2008 = Price level 2008 / Price level 2007 = 0.7 / 0.67 = 11.67%

B) 2007: Remains the same as in A.
2008: MV = PY (equation of exchange) ,

where P= ?, M = 1,100, V = 8, and Y = 12,000.
1,100*8 = 12,000*P
Therefore, P = 8,800/12,000 = 0.73 (Price level 2008)
Inflation from 2007 to 2008 = Price level 2008 / Price level 2007 = 0.73 / 0.67 = 12.22%

C) 2007: Remains the same as in A.
2008: MV = PY (equation of exchange) ,

where P= ?, M = 1,100, V = 8, and Y = 12,600.
1,100*8 = 12,600*P
Therefore, P = 8,800 / 12,600 = 0.70 (Price level 2008)
Inflation from 2007 to 2008 = Price level 2008 / Price level 2007 = 0.70 / 0.67

Note: Rest part post as a seperate question.