Question

# Assume the economy is described by the following: Y=3,000 C=200+0.9(Y-T) I=400-40r G=T=500 R=5 NX=400-400e Solve for...

Assume the economy is described by the following:

Y=3,000

C=200+0.9(Y-T)

I=400-40r

G=T=500

R=5

NX=400-400e

Solve for net exports and the real exchange rate.

As,

So, 3,000 = 200 + 0.9(Y-T) + (400-40r) + 500 + (400-400e)

As, r = 5, T = 500 and Y = 3,000

So, 3,000 = 200 + 0.9(3000-500) + (400-40*5) + 500 + (400-400e)

So, 3000 = 200 + 0.9*2500 + (400-200) + 500 + 400 - 400e

3000 = 200 + 2250 + 200 + 500 + 400 - 400e

3000 = 3550 - 400e

400e = 3550 - 3000 = 550

So, e = 550/400 = 11/8 = 1.375

As, NX = 400 - 400e = 400 - 400*1.375

NX = 400 - 550

NX = -150

• So, Net exports (NX) is -150 and real exchange rate (e) is 1.375

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