Question

China's real GDP in 2016 was 11 trillion dollars. The Chinese economy can be
described by the following equations (gures are in billions of dollars):
Y = 11; 000
G = 3; 000
T = 1; 000
C = 3000 + 0:25(Y - T)
I(r) = 3500 - 200r

(a) Compute Chinese national saving, private saving, and the interest rate
that would balance Chinese saving and investment (assuming a closed
economy.)

(b) Obviously, China is not a closed economy. What must the prevailing world
interest rate be if Chinese net exports are equal to 2000? What are net
capital out
ows in that case?

(c) Suppose that Chinese rms suddenly become more willing to borrow for
investment. Demand for investment spending becomes:
I(r) = 4500 - 200r
By how much will net capital out
ows fall?

Answer 1

Y=C+I+G .......................... In case of Closed Economy

Y=3000+0.25(Y-T)+3500-200r+3000=9500+0.25Y-0.25T-200r

0.75Y=9500-0.25(1000)-200r

0.75Y=9750-200r

0.75(11000)=9750-200r

8250=9750-200r

r=7.5%

Answer for b)

In Closed Economy we have

Y=C+I+G+EX

11000=3000+0.25(11000-1000)+3500-200r+3000+2000

8000=11000-200r

r=3000/200=15%

Y-C-G=I+NX=I+NO

11000-3250-3000=3500-200(15)+NO

4750=500+NO

NO=$4250

Answer for c)

Y-C-G=4500-200r+NO

4750=4500-200(15)+NO

250+3000=NO=3250

Hence Net NO will fall by 4250-3250=$1000