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A = 400 c=0.8 b = 30 io = 5 (percent) m = 0.2 Q=0 X = 250 (a) Calculate the equilibrium level of

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A = 400 c=0.8 b = 30 io = 5 (percent) m = 0.2 Q=0 X = 250 (a) Calculate the equilibrium level of income. (b) Calculate the balance of trade. (c) Calculate the open economy multiplier, that is, the effect of an increase in A on equilib- rium output. (To answer this question, you may want to use the appendix to this chapter.) (d) Assume there is a reduction in export demand of AX = 1 (billion). By how much does income change? By how much does the trade balance worsen? (e) How much does a one percentage point increase in the interest rate (from 5 percent to 6 percent) improve the trade balance? Explain why the trade balance improves when the interest rate rises.

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