Consider an economy described by the following equations:
Y = C + I + G + NX
Y = 5,000
G = 1,000
T = 1,000
C = 250 + 0.75 (Y – T)
I = 1,000 – 50 r
NX = 500 - 500ε
r = r* = 5
a. In this economy, solve for national saving, investment, the trade balance, and the equilibrium exchange rate.
b. Suppose now that g rises to 1,250. Solve for national saving, investment, the trade balance and the equilibrium exchange rate. Explain what you find.
c. Now suppose that the world interest rate rises from 5% to 10%. (G is again 1,000.) Solve for national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find.