Tenement Yaard is a small open economy described by the following long-run classical equations where Y is the economy's real GDP, T-taxes, G- government spending, NX - net exports, I- investment C- consumption, r- domestic interest rates, r*- world interest rates:

Y= C + I + G + NX

Y = 6000

G = 1000

T = 1000

C = 300 + 0.8 (Y-T)

I = 2000 - 50r

NX = 500 - 400e

r = r* = 4

a. Find the national saving, investment, trade balance and the equilibrium exchange rate.

b. The government spending of Tenement Yaard rises to 1400. Compute the investment, trade balance, national savings and the equilibrium exchange rate.

Explain what you find compared to part (a) and illustrate graphically.

c. Now suppose that the world interest rate rises from 4 to 8 percent (G is again 1000). Solve for national saving, investment, trade balance and the equilibrium exchange rate.

Explain what you find compared to part (a) and illustrate graphically.