1. Suppose that the US and the Rest of the World are large open economies. That is, the sum of net exports in the US and the Rest of the World must be equal to zero. Solve for the equilibrium world interest rate. Note that I have assumed that net factor payments are equal to zero, meaning that CA = NX.

1. The Large open Economy. Consider the us economy which has desired i. A reduction in us government spending consumption and investment functions: ii. A decrease in US investment opportunities, This is modelled as a Gus : 100 + 0'75Yus 7 5007'\" and 105 : 200 7 500,4\" reduction in the intercept of the desired investment function. An increase in US productivity today. Furthermore, government spending and the full employment level of output ' iv. A decrease in US consumption. are given by: Gus = 400 and pus = 2,000 Based on your analysis, briey discuss why economists do not believe that trade decits are necessarily a sign of an unhealthy economy. The rest of the world has a desired consumption and investment as follows: d) One way to reduce the trade decit is to introduce protectionist trade CROW = 100 +0.6YR0W 50M and 130'\" = 200 500w\" measures, such as tends, quotes or restrictions. In the most extreme case, the US economy could be closed to trade, NXUS = 0. Using our L'kme' government spending and full employment output are: model, What would the effect of this extreme protectionist policy be on . - - - 7 GROW = 200 and yxow = 11 500 consumption, Investment, savings and output. :1) Suppose that the US and the Rest of the World are large open economies That is, the sum of net exports in the US and the Rest of the World must be equal to zero. Solve for the equilibrium world interest rate. Note that I have assumed that net factor payments are equal to zero, meaning that CA = NXi Fill in the table with the correct equilibrium values. Be sure to show your work. United Stata Rest of World Consumption Investment Government Spending Net Exports Absorption Saving Graph the saving and investment curves for the US, with saving and investment on the horizontal axis and the real interest rate on the vertical axis Clearly label the world interest rate as well as the trade balance on your graph. Using your graph, discuss what will be the effect on the US trade balance and the world interest rate of