1. 3. Consider the following classical economy:

Desired consumption Desired investment c

Cd

= 300+0.5Y −200r.

Id

= 200−300r.

Government purchases Net exports Real exchange rate Full-employment output G = 100.

NX = 150−0.1Y −0.5e.

e = 20+600r.

¯¯¯

Y = 900.

a. What are the equilibrium values of the real interest rate, real exchange rate, consumption, investment, and net exports?

b. Now suppose that full-employment output increases to 940. What are the equilibrium values of the real interest rate, real exchange rate, consumption, investment, and net exports?

c. Suppose that full-employment output remains at 940 and that government purchases increase to 132. What are the equilibrium values of the real interest rate, real exchange rate, consumption, investment, and net exports?