Consider a small open economy described by the following equations: Y=C+I+G+NX Y=8,000 G=2,500 T=2,000 C=500+23(Y−T) I=9

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Consider a small open economy described by
the following equations:
Y=C+I+G+NX
Y=8,000
G=2,500
T=2,000
C=500+23(Y−T)
I=900−50r
NX=1,500−250ϵ
r=r∗=8
a) In this economy, solve for consumption,
private saving, public saving, national saving, investment, the
trade balance, and the equilibrium real exchange rate.
b) Suppose that GG is cut to
2,000. Solve for consumption, private saving, public saving,
national saving, investment, the trade balance, and the equilibrium
real exchange rate. Note: this is a
long-run analysis so this is a change in demand
and not a change in fixed supply.
c) Comparing your answers to parts (a) and
(b), what does a decrease in government spending do to domestic
investment demand (I)(I)? Explain your answer.
d) Comparing your answers to parts (a) and
(b), you should have determined that the real exchange
rate (ϵ)(ϵ) declined. Explain how a decrease
in GG brought this about.
e) Go back to the original economy
with G=2,500G=2,500, and suppose that the world interest
rate (r∗)(r∗) falls from 8 to 3 percent. Solve one last
time for consumption, private saving, public saving, national
saving, investment, the trade balance, and the equilibrium real
exchange rate.
f) Comparing your answers to parts (a) and
(e), you should have determined that the real exchange
rate (ϵ)(ϵ) increased. Explain how a decrease
in r∗r∗ brought this about.