Q1. (a).How does good market equilibrium is achieved in small open economy? Explain by diagram.

(b). Explain the effect of decrease in wealth in a small open economy case? How does it affect

Equilibrium? .Show the analysis by diagram

Q2. Consider two large open economies, the home economy and the foreign economy. In the home country the following relationships hold:

Cd = 320 + 0.4(Y - T) - 200 r";Id = 150 - 200 r"; output, Y = 1000; taxes, T = 200;G = 275.

In the foreign country the following relationships hold: desired consumption,

Cd _For = 480 + 0.4(Y _For - T _For ) - 300 r'" ,Id _For = 225 - 300 r";Y_For, = 1500; T_For, = 300 ; G_For, = 300.

(i). What is the equilibrium interest rate in the international capital market? What are the equilibrium values of consumption, national saving, investment, and the current account balance in each country?