Open Economy

In another faraway galaxy, there are only two countries: Essos (E) and Westeros (W). These countries have been abundantly blessed with nature, and their respective labor markets are in equilibrium. As a result, both countries are currently in a steady state where output is at the full-employment level.

The following equations describe the economies of Essos and Westeros.

Essos

1. Consumption:C=150+0.3Y125r^
2. Investment: I=420-75r^
3. Government Purchases:G=70
4. Full Employment Output: Y=800

Westeros

1. Consumption:C=160+0.4Y150r^
2. Investment: I=90250r^
3. Government Purchases: G=150
4. Full Employment Output: Y=500

where^is the world interest rate, a world which consists of Essos and Westeros

.

1. For both Essos and Westeros, write the current account as a function of the world interest rate,^
2. What is the equilibrium value of the world interest rate?
3. What are the equilibrium values of consumption, national saving, investment, the current account balance, and absorption in each country?