2. 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 − 50r, NX = 500 − 500e, 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 percent. (G is again 1,000). Solve for national saving, investment, the trade balance, and the equilibrium exchange rate. Explain what you find.