Consider an open economy for Openland described by the following equations (all figures in millions of dollars):

Y = C + I + G + NX

Y = 8,000 (current value of output)

G = 2,000

T = 1,000 + .1(Y)

C = 450 + 0.75 (Y - T)

I = 2,000 - 40 r

NX = 700- 600 ( is the exchange rate)

r = r* = 5 (real rate of interest)

a) What is the current state of this economy in term of national saving, investment, the trade balance and the equilibrium exchange rate?

b) Suppose government approve an infra structure investment which raises G to 2,250. How would this increase impact what you have calculated in (a) above?

c) Now suppose that the world interest rate rises from 5 to 10 percent (G is again 2,000). Would the change in interest have the same impact on National saving and investment? Does it impact the exchange rate? Explain

d) There has been an argument between the chief economic advisor in Openland and secretary of Treasury who is arguing the current state of the economy is below full employment and government must reduce the current taxes to boost the economy. Assuming the real interest rate remains at 5 and exchange rate remain the same as your calculation in part (a) above, with whom do you agree? (Hint; you need to calculate the equilibrium for Y, rather than using the current income)