A small open economy with fixed prices can be described by the income-expenditure model:

Consumption:C = 500 + 0.8YD;where YD = disposable income

Planned investment:IPlanned= 600 - 600i,where i =interest rate

Taxes:T = 150 + 0.06Y

Transfers:TR = 600 - 0.04Y

Government spending:G = 468

Exports:X = 400 - 10EFC/DC

Imports:IM = 200 + 0.12Y + 30EFC/DC

Part (a)Find the equilibrium level of output, trade balance, and private savings.

Initially, the economy is in its equilibrium as shown in part (a).Recently, there is a change in preference between domestic goods and foreign goods that favour domestic goods.As a result, autonomous exports change by 16%.

Part (b)Immediately after the shock, what is the level of unplanned investment?Compare to your answer in part (a), find the change in equilibrium level of output.Find the new level of private savings.

Part (c)(Continued from part b) Now, suppose the initial shock also causes interest rate to change by 1 percentage point and the exchange rate to change by 0.25 FC per DC.Find the new equilibrium levels of output, trade balance, and private savings.