- 1 Consider An Economy Described By The Following Equations Y C G Nx Y 8 000 G 2 500 T 2 000 C 500 1 (120.95 KiB) Viewed 63 times
1. Consider an economy described by the following equations: = Y = C + + G + NX Y = 8,000 G = 2,500 T = 2,000 C = 500 + 2/3 (Y – T) 1 = 900 - 5000r* NX = 1,500 – 250€ r=p* = 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 per cent. (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. 2. What will happen to the trade balance and the real exchange rate of a small open а economy when government purchases increase, such as during a war? Does your answer depend on whether this is a local war or a world war?