1) In a large open economy, the home country's saving and investment equations are:

Sd = 200 + 1400 rw and Id = 300 - 400 rw.

The foreign country's saving and investment equations are:

Sd = 50 + 600rw and Id = 75 - 100 rw.

Calculate the equilibrium world real interest rate, saving and investment in each country, and the current account balance in each country. (20 points)

2) Consider a large open economy that has a zero current account balance. What are the effects on the world real interest rate, national saving, investment, and the current account balance in equilibrium if(20 points)

(a) future income rises?

(b) business taxes decline?

(c) government purchases decline?

(d) the future marginal product of capital declines?

3) Suppose the money demand function is given by

M^d/P = 640 + 0.1Y - 5000 (r + ^e).

Suppose the central bank changes the nominal money supply depending on income and inflation:

M^s = 1000 + 0.1Y - 4000.

If expected inflation equals actual inflation = 0.03, Y = 1000, and r = 0.02, calculate the price level.(10 points)

4) For each outcome below, tell what type of shift must have taken place in either the aggregate demand curve or the long-run aggregate supply curve.(15 points)

(a) In the short run, the price level is unchanged and output rises.

(b) In the long run, the price level declines and output is unchanged.

(c) In the long run, the price level rises and output declines.