2- Consider an economy described by the following equations: Y= C+I+G+NX, Y=5000

Question

2- Consider an economy described by the following equations:

Y= C+I+G+NX, Y=5000

, G=1000

, T=1000

, C=250+ 0.75(Y-T)

, I=1000-50r, NX=500-500?,

r=r*=5

a.in this economy solve for national saving,investment,the trade balance,and the quilibrium exchange rate.

b-suppose now that G rises to 1250. solve for national saving, investment, the trade balance, and the equilibrium exchange rate. explain what you find.

c-now suppose that the world intrest rate rises from 5 to 10 percent. (G is again 1000). solve for national saving,investment, the trade balance, and the equilibrium exchange rate. explain what you find.

Explanation / Answer

a) national saving I = 1000 - 250 = 750
investment = 750
trade balance = 0
b)national saving = 750
investment= 750
trade balance= (-250) i.e imports>exports
c) national saving= investment= 500
trade balance = 250 i.e exports>imports

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