Question

Consider an economy described by the following equations:

Y=C+I+G+NX,

Y=8,000

G=2,500

T=2,000

C=500 + 0.75(Y−T)

I=900−50r

NX=1,500−250ϵ

r=r∗=8.

a. In this economy, solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate.

b. Suppose now that G is cut to 2,000. Solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find.

c. Now suppose that the world interest rate falls from 8 to 3 percent. (G is again 2,500.) Solve for private saving, public saving, national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find.

Answer 1

Solution: